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.
Funding source: Grant-in-Aid for Scientific Research (C)
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.
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Articles in the same Issue
- Advances
- What does a relative price of investment wedge reveal about the role of investment-specific technology?
- Envelope wages, hidden production and labor productivity
- Should individuals migrate before acquiring education or after? A new model of Brain Waste vs. Brain Drain
- Investment, technological progress and energy efficiency
- Bounded rationality and the ineffectiveness of big push policies
- Contributions
- Dissecting the act of god: an exploration of the effect of religiosity on economic activity
- Cross-industry growth differences with asymmetric industries and endogenous market structure
- Persistent Inequality, Corruption, and Factor Productivity
- The Finnish Great Depression of the 1990s: reconciling theory and evidence
- The growth-volatility relationship redux: what does volatility decomposition tell?
- Fiscal stimulus and unemployment dynamics