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Optimal Government Spending and Unemployment

Author

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  • Ludger Linnemann

    (University of Bonn)

  • Andreas Schabert

    (University of Dortmund)

Abstract

We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy is contrasted with a reference policy which would be first best in a frictionless economy. Results are: the Ramsey policy i) implies a higher steady state ratio of government spending to private consumption than the reference policy; ii) is procyclical under technology shocks and countercyclical under demand shocks (while the public spending ratio to private consumption is always countercyclical); iii) stabilizes employment, in some cases even at the cost of higher consumption volatility; iv) is qualitatively unaltered in a sticky price version with jointly optimal monetary and fiscal policy.

Suggested Citation

  • Ludger Linnemann & Andreas Schabert, 2008. "Optimal Government Spending and Unemployment," Tinbergen Institute Discussion Papers 08-024/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20080024
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    References listed on IDEAS

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    Cited by:

    1. Eric Mayer & Nikolai Stähler, 2013. "The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 40(1), pages 39-74, February.

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    More about this item

    Keywords

    Optimal fiscal policy; government spending; labor market frictions; unemployment; stabilization policy;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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