Dynamic Employment and Hours Effects of Government Spending Shocks

In this paper, we analyze the dynamic behaviour of employment and hours worked per worker in a stochastic general equilibrium model with a matching mechanism between vacancies and unemployed workers. The model is estimated for the United States using the Generalized Methods of Moments (GMM) estimation technique. An increase in government spending raises hours worked per worker, and crowds out private consumption due to a negative wealth effect. On the path converging towards the steady state, private consumption is below its long-run average and increases, which implies that the interest rate is above its long-run average and declines. The interest rate effect dominates the pure economic rent effect on the capital value of a hired worker to the firm, causing a reduction of job openings and consequently a decrease in employment. These results are contrasted with the predictions of a version of the Burnside, Eichenbaum and Rebelo's (1993) labor hoarding model.

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Also published as:

Journal of Economic Dynamics and Control (0165-1889)
July 2000. Vol. 24, Iss. 8, pp. 1233-63