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Fiscal Expansions, Unemployment, And Labor Force Participation: Theory And Evidence

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  • Markus Brückner
  • Evi Pappa

Abstract

Structural VARs indicate that for many OECD countries labor force participation, employment, and the unemployment rate significantly increase following increases in government expenditures under a variety of specifications and identification schemes. Fiscal expansions also tend to increase real wages. Existing models have difficulties in generating such responses. We show that the empirical regularities can be reproduced with two additions into a standard New Keynesian model with matching frictions: (a) a labor force participation choice and (b) workers’ heterogeneity.

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  • Markus Brückner & Evi Pappa, 2012. "Fiscal Expansions, Unemployment, And Labor Force Participation: Theory And Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1205-1228, November.
    • Handle: RePEc:wly:iecrev:v:53:y:2012:i:4:p:1205-1228
    DOI: j.1468-2354.2012.00717.x
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