A Fiscal Stimulus and Jobless Recovery

We analyze the effects of a government-spending expansion in a dynamic stochastic general equilibrium model with Mortensen-Pissarides labor-market frictions, deep habits in private and public consumption, investment adjustment costs, a constant elasticity of substitution (CES) production function, a...

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Bibliographic Details
Published in:The Scandinavian journal of economics 2014-07, Vol.116 (3), p.669-701
Main Authors: Cantore, Cristiano, Levine, Paul, Melina, Giovanni
Format: Article
Language:English
Subjects:
Capital investments
CES production function
Consumer behavior
Consumption function
deep habits
E24
E62
Economic models
Economic recovery
Elasticity
Elasticity of substitution
Estimation
Fiscal policy
Fiscal stimulus
General economic equilibrium
Government spending
Investment
Labor economics
Labor market
labor-market search-match frictions
Labour market
Macroeconomics
Production functions
Stochastic processes
Studies
Unemployment
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Summary:We analyze the effects of a government-spending expansion in a dynamic stochastic general equilibrium model with Mortensen-Pissarides labor-market frictions, deep habits in private and public consumption, investment adjustment costs, a constant elasticity of substitution (CES) production function, and adjustments in employment at both intensive and extensive margins. The combination of deep habits and CES technology is crucial. The presence of deep habits magnifies the responses of macroeconomic variables to a fiscal stimulus, while an elasticity of substitution between capital and labor in the range of available estimates allows the model to produce a scenario compatible with the observed jobless recovery.
ISSN:0347-0520
1467-9442
DOI:10.1111/sjoe.12066