Home Business & Economics Fiscal stimulus and unemployment dynamics
Article
Licensed
Unlicensed Requires Authentication

Fiscal stimulus and unemployment dynamics

  • Chun-Hung Kuo and Hiroaki Miyamoto EMAIL logo
Published/Copyright: May 16, 2019

Abstract

Focusing on both hiring and firing margins, this paper revisits effects of fiscal stimulus on unemployment. We develop a DSGE model with search frictions where job separation is endogenously determined. The predictions of the model are in contrast with earlier studies that assume exogenous separation. Our model can capture the empirical pattern of responses of the job finding, separation, and unemployment rates to a government spending shock, obtained from a structural VAR model with the US data. However, our model fails to capture the response of vacancies and the volatility of unemployment. We discuss the roles of cyclical movements of matching efficiency and labor force participation to fix this model’s shortcoming.

JEL Classification: E24; E62; J64

Award Identifier / Grant number: 26380248

Funding statement: Part of this research is supported by the Grant-in-Aid for Scientific Research (C) (Funder Id: http://dx.doi.org/10.13039/501100001691, Kakenhi No. 26380248) and IUJ Research Institute research fund. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Acknowledgment

We thank the associate editor (Eva Carceles-Poveda) and anonymous referee for their insightful comments. We also thank Noritaka Kudoh, Yuya Takahashi, Makoto Yano as well as seminar participations at DSGE workshop, Hokkaido University, Kyoto University, The University of Tokyo, and Waseda University.

References

Ahn, H. J. 2016. Heterogeneity in the Dynamics of Disaggregate Unemployment. Finance and Economics Discussion Series 2016-063. Board of Governors of the Federal Reserve System (U.S.).10.17016/FEDS.2016.063Search in Google Scholar

Ahn, H. J., and J. D. Hamilton. 2016. “Heterogeneity and Unemployment Dynamics.” NBER Working Papers 22451. National Bureau of Economic Research.10.3386/w22451Search in Google Scholar

Andolfatto, D. 1996. “Business Cycles and Labor Market Search.” American Economic Review 86: 112–132.Search in Google Scholar

Barnichon, R. 2010. “Building a Composite Help-Wanted Index.” Economics Letters 109: 175–178.10.1016/j.econlet.2010.08.029Search in Google Scholar

Barnichon, R., and A. Figura. 2010. “What Drives Movements in the Unemployment Rate? A Decomposition of the Beveridge Curve.” FEDS Working Paper 2010–2010.10.2139/ssrn.1895645Search in Google Scholar

Barnichon, R., and A. Figura. 2015. “Labor Market Heterogeneity and the Aggregate Matching Function.” American Economic Journal: Macroeconomics 7 (4): 222–249.10.1257/mac.20140116Search in Google Scholar

Baxter, M., and R. G. King. 1993. “Fiscal Policy in General Equilibrium.” American Economic Review 83 (3): 315–334.Search in Google Scholar

Bishop, J. H. 1981. “Employment in Construction and Distribution Industries: The Impact of the New Jobs Tax Credit.” In Studies in Labor Markets, edited by S. Rosen, 209–246. Chicago: University of Chicago Press.Search in Google Scholar

Blanchard, O., and R. Perotti. 2002. “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output.” Quarterly Journal of Economics 117 (4): 1329–1368.10.1162/003355302320935043Search in Google Scholar

Brückner, M., and E. Pappa. 2012. “Fiscal Expansions, Unemployment, and Labor Participation.” International Economic Review 53: 1205–1228.10.1111/j.1468-2354.2012.00717.xSearch in Google Scholar

Cahuc, P., S. Carcillo, and T. L. Barbanchon. 2019. “The effectiveness of Hiring Credits.” Review of Economic Studies 86: 593–626.10.1093/restud/rdy011Search in Google Scholar

Campolmi, A., E. Faia, and R. Winkler. 2011. “Fiscal Calculus and the Labor Market.” The B.E. Journal of Macroeconomics 11(1). DOI: 10.2202/1935-1690.2280Search in Google Scholar

Davis, S. J., R. J. Faberman, and J. C. Haltiwanger. 2006. “The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links.” NBER Working Paper #12167.10.3386/w12167Search in Google Scholar

Den Haan, W., G. Ramey, and J. Watson. 2000. “Job Destruction and Propagation of Shocks.” American Economic Review 90 (3): 482–498.10.1257/aer.90.3.482Search in Google Scholar

Elsby, M., and R. Michaels. 2008. “Marginal Jobs, Heterogeneous Firms, & Unemployment Flows.” NBER Working Paper #13777.10.3386/w13777Search in Google Scholar

Elsby, M., R. Michaels, and G. Solon. 2009. “The Ins and Outs of Cyclical Unemployment.” American Economic Journal: Macroeconomics 1 (1): 84–110.10.3386/w12853Search in Google Scholar

Elsby, M., B. Hobijn, and A. Sahin. 2015. “On the Importance of the Participation Margin for Labor Market Fluctuations.” Journal of Monetary Economics 72: 64–82.10.1016/j.jmoneco.2015.01.004Search in Google Scholar

Faia, E., W. Lechthaler, and C. Merkl. 2013. “Fiscal Stimulus and Labor Market Policies in Europe.” Journal of Economic Dynamics and Control 37: 483–499.10.1016/j.jedc.2012.09.004Search in Google Scholar

Fujita, S., and G. Ramey. 2009. “The Cyclicality of Separation and Job Finding Rates.” International Economic Review 50 (2): 415–430.10.1111/j.1468-2354.2009.00535.xSearch in Google Scholar

Galí, J., J. David Lóez-Salido, and J. Vallés. 2007. “Understanding the Effects of Government Spending on Consumption.” Journal of the European Economic Association 5 (1): 227–270.10.1162/JEEA.2007.5.1.227Search in Google Scholar

Hagedorn, M., and I. Manovskii. 2008. “The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited.” American Economic Review 98: 1692–1706.10.1257/aer.98.4.1692Search in Google Scholar

Hall, R. E. 2005. “Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market.” Review of Economics and Statistics 297: 397–407.10.3386/w11183Search in Google Scholar

Hall, R. E., and P. Milgrom. 2008. “The Limited Influence of Unemployment on the Wage Bargain.” American Economic Review 98: 1653–1674.10.1257/aer.98.4.1653Search in Google Scholar

Hall, R. E., and S. Schulhofer-Wohl. 2018. “Measuring Job-Finding Rates and Matching Efficiency with Heterogeneous Job-Seekers.” American Economic Journal: Macroeconomics 10 (1): 1–32.10.1257/mac.20170061Search in Google Scholar

Hosios, A. 1990. “On the Efficiency of Matching and Related Models of Search and Unemployment.” Review of Economic Studies 57: 279–298.10.2307/2297382Search in Google Scholar

Krusell, P., T. Mukoyama, R. Rogerson, and A. Şahin. 2017. “Gross Worker Flows over the Business Cycle.” American Economic Review 107 (11): 3447–3476.10.1257/aer.20121662Search in Google Scholar

Linnemann, L. 2006. “The Effect of Government Spending on Private Consumption: A Puzzle?” Journal of Money Credit and Banking 38: 1715–1735.10.1353/mcb.2006.0094Search in Google Scholar

Mayer, E., S. Moyen, and N. Stähler. 2010. “Government Expenditures and Unemployment : A DSGE Perspective.” Discussion paper/Deutsche Bundesbank/Series 1, Economic studies 18/2010.10.2139/ssrn.2785382Search in Google Scholar

Merz, M. 1995. “Search in the Labor Market and the Real Business Cycle.” Journal of Monetary Economics 36: 269–300.10.1016/0304-3932(95)01216-8Search in Google Scholar

Monacelli, T., R. Perotti, and A. Trigari. 2010. “Unemployment Fiscal Multipliers.” Journal of Monetary Economics 57 (5): 531–553.10.1016/j.jmoneco.2010.05.009Search in Google Scholar

Mortensen, D. T., and C. A. Pissarides. 1994. “Job Creation and Job Destruction in the Theory of Unemployment.” Review of Economic Studies 61: 397–415.10.2307/2297896Search in Google Scholar

Mortensen, D. T., and E. Nagypál. 2007. “More on Unemployment and Vacancy Fluctuations.” Review of Economic Dynamics 10: 327–347.10.1016/j.red.2007.01.004Search in Google Scholar

Neumark, D, and D. Grijalva. 2017. “The Employment Effects of State Hiring Credits.” Industrial and Labor Relations Review 70 (5): 1111–1145.10.1177/0019793916683930Search in Google Scholar

Perotti, R. 2007. “In Search of the Transmission Mechanism of Fiscal Policy.” NBER Macroeconomics Annual 2001, 22: 169–126.10.3386/w13143Search in Google Scholar

Petrongolo, B., and C. A. Pissarides. 2001. “Looking into the Black Box: A Survey of the Matching Function.” Journal of Economic Literature 39: 390–431.10.1257/jel.39.2.390Search in Google Scholar

Petrongolo, B. and C. A. Pissarides. 2008. “The Ins and Outs of European Unemployment.” American Economic Review 98: 256–262.10.1257/aer.98.2.256Search in Google Scholar

Pissarides, C. A. 2000. Equilibrium Unemployment Theory. 2nd ed. Cambridge, MA: MIT Press.Search in Google Scholar

Pissarides, C. A. 2007. “The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?” CEP Discussion Paper No 839.Search in Google Scholar

Pissarides, C. A. 2009. “The Unemployment Volatility Puzzle: is Wage Stickiness the Answer?” Econometrica 77: 1339–1369.10.3982/ECTA7562Search in Google Scholar

Perloff, J. M. and M. L. Wachter. 1979. “The New Jobs Tax Credit: An Evaluation of the 1977-78 Wage Subsidy Program.” American Economic Review 69 (2): 173–179.Search in Google Scholar

Shimer, R. 2005. “The Cyclical Behavior of Equilibrium Unemployment and Vacancies.” American Economic Review 95: 25–49.10.1257/0002828053828572Search in Google Scholar

Shimer, R. 2012. “Reassessing the Ins and Outs of Unemployment.” Review of Economic Dynamics 15: 127–148.10.1016/j.red.2012.02.001Search in Google Scholar

Silva, J. I., and M. Toledo. 2009. “Labor Turnover Costs and the Cyclical Behavior of Vacancies and Unemployment.” Macroeconomic Dynamics 13: 76–96.10.1017/S1365100509080122Search in Google Scholar

Uhlig, H. 2010. “Some Fiscal Calculus.” American Economic Review 100 (2): 30–34.10.1257/aer.100.2.30Search in Google Scholar

Yuan, M., and W. Li. 2000. “Dynamic Employment and Hours Effects of Government Spending Shocks.” Journal of Economic Dynamics and Control 24 (8): 1233–1263.10.1016/S0165-1889(99)00007-XSearch in Google Scholar

Nagypál, Eva. 2004. Worker Reallocation over the Business Cycle: The Importance of Job-to-Job Transitions. Mimeo, Northwestern University.Search in Google Scholar

Published Online: 2019-05-16

©2019 Walter de Gruyter GmbH, Berlin/Boston

Downloaded on 31.12.2025 from https://www.degruyterbrill.com/document/doi/10.1515/bejm-2016-0211/html
Scroll to top button