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FISCAL RULES AND UNEMPLOYMENT

  • Britta Gehrke (a1)
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.

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Corresponding author
Address correspondence to: Britta Gehrke, Friedrich-Alexander-Universität Erlangen-Nürnberg, Lange Gasse 20, 90403 Nürnberg, Germany; e-mail: britta.gehrke@fau.de.
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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.

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Macroeconomic Dynamics
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