Hostname: page-component-76fb5796d-2lccl Total loading time: 0 Render date: 2024-04-29T00:38:17.255Z Has data issue: false hasContentIssue false
  • English
  • Français

FISCAL RULES AND UNEMPLOYMENT

Published online by Cambridge University Press:  07 June 2018

Britta Gehrke
Britta Gehrke*
Affiliation:
Friedrich-Alexander University Erlangen-Nürnberg (FAU) and Institute for Employment Research (IAB)
*
Address correspondence to: Britta Gehrke, Friedrich-Alexander-Universität Erlangen-Nürnberg, Lange Gasse 20, 90403 Nürnberg, Germany; e-mail: britta.gehrke@fau.de.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper shows how fiscal policy affects unemployment in a New Keynesian model with search and matching frictions and distortionary taxation. The model is estimated using US data that includes labor market flows and distinct fiscal instruments. Several findings stand out. First, unemployment multipliers for spending and consumption tax cuts are substantial, even though output multipliers turn out to be less than one. Second, multipliers for labor tax cuts are small. Third, fiscal rules enhance the positive effects of discretionary fiscal policy. However, these expansionary effects on the multipliers are modest compared to earlier studies.

Keywords

Fiscal PolicyFiscal RulesUnemploymentSearch and Matching
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 8 , December 2019 , pp. 3293 - 3326
Copyright
Copyright © Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I thank two anonymous referees, Leo Kaas, Britta Kohlbrecher, Monika Merz, Christian Merkl, Felix Schröter, Antonella Trigari, and participants at ESSLE 2015 in Buch, New Zealand Macroeconomic Dynamics Workshop 2016, SES 2015 in Perth, SMYE in Vienna, and the seminars at the Australian National University, the IAB, and the University of Hamburg for valuable comments. I am indebted to Bea Kraus and Martin Fukac for discussing previous versions of this paper. Financial support from the Fritz Thyssen Research Foundation is gratefully acknowledged.

References

REFERENCES

An, S. and Schorfheide, F. (2007) Bayesian analysis of DSGE models. Econometric Reviews 26, 113–172.Google Scholar
Andolfatto, D. (1996) Business cycles and labor-market search. American Economic Review 86, 112–132.Google Scholar
Arseneau, D. M. and Chugh, S. K. (2012) Tax smoothing in frictional labor markets. Journal of Political Economy 120, 926–985.Google Scholar
Auerbach, A. J. and Gorodnichenko, Y. (2012) Measuring the output responses to fiscal policy. American Economic Journal: Economic Policy 4, 1–27.Google Scholar
Blanchard, O. and Galí, J. (2010) Labor markets and monetary policy: A New Keynesian model with unemployment. American Economic Journal: Macroeconomics 2, 1–30.Google Scholar
Blanchard, O. and Perotti, R. (2002) An empirical characterization of the dynamic effects of changes in government spending and taxes on output. The Quarterly Journal of Economics 117, 1329–1368.Google Scholar
Campolmi, A., Faia, E., and Winkler, R. (2011) Fiscal calculus in a New Keynesian model with labor market frictions. BE Journal of Macroeconomics (Contributions) 11, Article 38.Google Scholar
Canova, F. and Sala, L. (2009) Back to square one: Identification issues in DSGE models. Journal of Monetary Economics 56, 431–449.Google Scholar
Christoffel, K., Kuester, K., and Linzert, T. (2009) The role of labor markets for euro area monetary policy. European Economic Review 53, 908–936.Google Scholar
Cogan, J. F., Cwik, T., Taylor, J. B., and Wieland, V. (2010) New Keynesian versus old Keynesian government spending multipliers. Journal of Economic Dynamics and Control 34, 281–295.Google Scholar
Corsetti, G., Meier, A., and Müller, G. J. (2012) Fiscal stimulus with spending reversals. Review of Economics and Statistics 94, 878–895.Google Scholar
Del Negro, M. and Schorfheide, F. (2006) How Good is What You've Got? DGSE-VAR as a Toolkit for Evaluating DSGE Models, Economic Review - Federal Reserve Bank of Atlanta, 91, 21–37.Google Scholar
Den Haan, W. J., Ramey, G., and Watson, J. (2000) Job destruction and propagation of shocks. American Economic Review 90, 482–498.Google Scholar
Drautzburg, T. and Uhlig, H. (2015) Fiscal stimulus and distortionary taxation. Review of Economic Dynamics 18, 894–920.Google Scholar
Eggertsson, G. B. (2011) What fiscal policy is effective at zero interest rates? In Acemoglu, D. and Woodford, M. (eds.), NBER Macroeconomics Annual 2010, vol. 25 of NBER Chapters, pp. 59–112. Chicago, IL: The University of Chicago Press.Google Scholar
Elsby, M. W., Michaels, R., and Solon, G. (2009) The ins and outs of cyclical unemployment. American Economic Journal: Macroeconomics 1, 84–110.Google Scholar
Faia, E. (2008) Optimal monetary policy rules with labor market frictions. Journal of Economic Dynamics and Control 32, 1600–1621.Google Scholar
Faia, E. (2009) Ramsey monetary policy with labor market frictions. Journal of Monetary Economics 56, 570–581.Google Scholar
Faia, E., Lechthaler, W., and Merkl, C. (2013) Fiscal stimulus and labor market policies in Europe. Journal of Economic Dynamics and Control 37, 483–499.Google Scholar
Faia, E., Lechthaler, W., and Merkl, C. (2014) Labor selection, Turnover Costs, and Optimal Monetary Policy. Journal of Money, Credit and Banking 46, 115–144.Google Scholar
Fatás, A. and Mihov, I. (2001) The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence. CEPR discussion papers no. 2259.Google Scholar
Fernández-Villaverde, J., Guerrón-Quintana, P., Kuester, K., and Rubio-Ramírez, J. (2015) Fiscal volatility shocks and economic activity. American Economic Review 105, 3352–3384.Google Scholar
Fève, P., Matheron, J., and Sahuc, J.-G. (2013) A pitfall with estimated DSGE-based government spending multipliers. American Economic Journal: Macroeconomics 5, 141–178.Google Scholar
Forni, L., Monteforte, L., and Sessa, L. (2009) The general equilibrium effects of fiscal policy: Estimates for the Euro area. Journal of Public Economics 93, 559–585.Google Scholar
Fujita, S. and Ramey, G. (2009) The cyclicality of separation and job finding rates. International Economic Review 50, 415–430.Google Scholar
Galí, J., Lopez-Salido, J. D., and Valles, J. (2007) Understanding the effects of government spending on consumption. Journal of the European Economic Association 5, 227–270.Google Scholar
Gertler, M., Sala, L., and Trigari, A. (2008) An estimated monetary DSGE model with unemployment and staggered nominal wage bargaining. Journal of Money, Credit and Banking 40, 1713–1764.Google Scholar
Ghosh, A. R., Kim, J. I., Mendoza, E. G., Ostry, J. D., and Qureshi, M. S. (2013) Fiscal fatigue, fiscal space and debt sustainability in advanced economies. Economic Journal 123, F4–F30.Google Scholar
Haefke, C., Sonntag, M., and Van Rens, T. (2013) Wage rigidity and job creation. Journal of Monetary Economics 60, 887–899.Google Scholar
Hagedorn, M. and Manovskii, I. (2008) The cyclical behavior of equilibrium unemployment and vacancies revisited. American Economic Review 98, 1692–1706.Google Scholar
Hall, R. E. (1997) Macroeconomic fluctuations and the allocation of time. Journal of Labor Economics 15, 223–50.Google Scholar
Hall, R. E. (2010) By How Much Does GDP Rise If the Government Buys More Output? Brookings papers on Economic Activity, pp. 183–231.Google Scholar
Hall, R. E. (2017) High discounts and high unemployment. American Economic Review 107, 305–330.Google Scholar
Hansen, G. D. (1985) Indivisible labor and the business cycle. Journal of Monetary Economics 16, 309–327.Google Scholar
Iskrev, N. (2010) Local identification in DSGE models. Journal of Monetary Economics 57, 189–202.Google Scholar
Jones, J. B. (2002) Has fiscal policy helped stabilize the postwar U.S. economy? Journal of Monetary Economics 49, 709–746.Google Scholar
Kormilitsina, A. and Zubairy, S. (2018) Propagation mechanisms for government spending shocks: A bayesian comparison. Journal of Money, Credit and Banking (forthcoming).Google Scholar
Krause, M. U., Lopez-Salido, D., and Lubik, T. A. (2008) Inflation dynamics with search frictions: A structural econometric analysis. Journal of Monetary Economics 55, 892–916.Google Scholar
Krause, M. U. and Lubik, T. A. (2007) The (Ir)relevance of real wage rigidity in the New Keynesian model with search frictions. Journal of Monetary Economics 54, 706–727.Google Scholar
Leeper, E. M., Plante, M., and Traum, N. (2010a) Dynamics of fiscal financing in the United States. Journal of Econometrics 156, 304–321.Google Scholar
Leeper, E. M., Walker, T. B., and Yang, S.–C. S. (2010b) Government investment and fiscal stimulus. Journal of Monetary Economics 57, 1000–1012.Google Scholar
Leeper, E. M. and Zha, T. (2003) Modest policy interventions. Journal of Monetary Economics 50, 1673–1700.Google Scholar
Lubik, T. A. (2009) Estimating a search and matching model of the aggregate labor market. FRB Richmond Economic Quarterly 95, 101–120.Google Scholar
Merkl, C. and Wesselbaum, D. (2011) Extensive versus intensive margin in germany and the United States: Any differences? Applied Economics Letters 18, 805–808.Google Scholar
Merz, M. (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36, 269–300.Google Scholar
Monacelli, T., Perotti, R., and Trigari, A. (2010) Unemployment fiscal multipliers. Journal of Monetary Economics 57, 531–553.Google Scholar
Mortensen, D. T. and Pissarides, C. A. (1994) Job creation and job destruction in the theory of unemployment. Review of Economic Studies 61, 397–415.Google Scholar
Mountford, A. and Uhlig, H. (2009) What are the effects of fiscal policy shocks? Journal of Applied Econometrics 24, 960–992.Google Scholar
Rahn, D. and Weber, E. (2017) Patterns of unemployment dynamics in Germany. Macroeconomic Dynamics, first view.Google Scholar
Ramey, V. A. (2011) Identifying government spending shocks: It's all in the timing. Quarterly Journal of Economics 126, 1–50.Google Scholar
Ramey, V. A. and Zubairy, S. (2018) Government spending multipliers in good times and in bad: Evidence from U.S. historical data. Journal of Political Economy (forthcoming).Google Scholar
Ravn, M. O. and Simonelli, S. (2007) Labor market dynamics and the business cycle: Structural evidence for the United States. Scandinavian Journal of Economics 109, 743–777.Google Scholar
Rotemberg, J. J. (1982) Monopolistic price adjustment and aggregate output. Review of Economic Studies 49, 517–531.Google Scholar
Sala, L., Söderström, U., and Trigari, A. (2008) Monetary policy under uncertainty in an estimated model with labor market frictions. Journal of Monetary Economics 55, 983–1006.Google Scholar
Shimer, R. (2005) The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95, 25–49.Google Scholar
Shimer, R. (2010) Labor Markets and Business Cycles, CREI Lectures in Macroeconomics. Princeton, NJ: Princeton University Press.Google Scholar
Shimer, R. (2012) Reassessing the ins and outs of unemployment. Review of Economic Dynamics 15, 127–148.Google Scholar
Smets, F. and Wouters, R. (2003) An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1, 1123–1175.Google Scholar
Smets, F. and Wouters, R. (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97, 586–606.Google Scholar
Stock, J. H. and Watson, M. W. (1999) Forecasting inflation. Journal of Monetary Economics 44, 293–335.Google Scholar
Taylor, J. B. (1993) Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39, 195–214.Google Scholar
Thomas, C. and Zanetti, F. (2009) Labor market reform and price stability: An application to the euro area. Journal of Monetary Economics 56, 885–899.Google Scholar
Traum, N. and Yang, S.-C. S. (2015) When does government debt crowd out investment? Journal of Applied Econometrics 30, 24–45.Google Scholar
Trigari, A. (2009) Equilibrium unemployment, job flows, and inflation dynamics. Journal of Money, Credit and Banking 41, 1–33.Google Scholar
Zanetti, F. (2017) Financial shocks, job destruction shocks and labor market fluctuations. Macroeconomic Dynamics, first view.Google Scholar
Zhang, J. (2017) Unemployment benefits and matching efficiency in an estimated DSGE model with labor market search frictions. Macroeconomic Dynamics 21 (8), 2033–2069.Google Scholar
Zubairy, S. (2014) On fiscal multipliers: Estimates from a medium scale DSGE model. International Economic Review 55, 169–195.Google Scholar
Supplementary material: PDF

Gehrke supplementary material

Online Appendix

Download Gehrke supplementary material(PDF)
PDF 1.4 MB