Type: Working Paper
Spending cuts and their effects on output, unemployment and the deficits
Working Paper, CEPR Discussion Paper, 2013/9383
BERMPEROGLOU, Dimitrios, PAPPA, Evi, VELLA, Eugenia, Spending cuts and their effects on output, unemployment and the deficits, CEPR Discussion Paper, 2013/9383 - https://hdl.handle.net/1814/29205
Retrieved from Cadmus, EUI Research Repository
We compare the output and unemployment effects of fiscal adjustments in different types of government outlays in the US, Canada, Japan, and the UK. We identify shocks in government consumption, investment, vacancies and government wages in a SVAR using sign restrictions extracted from a New-Keynesian model with matching frictions in the private and public sector, endogenous labor force participation and heterogeneous unemployed jobseekers. Government vacancy cuts are associated with the highest output losses and the lowest gains in terms of deficit reductions. This is because such shocks generate an additional wealth effect: they induce a fall in the number of working members of the household that leads to a fall in private consumption and investment demand. On the other hand, government wage cuts are the least destructive device for cutting the budget.
Cadmus permanent link: https://hdl.handle.net/1814/29205
External link: http://www.cepr.org/pubs/dps/DP9383
Series/Number: CEPR Discussion Paper; 2013/9383
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