Optimal Government Spending and Unemployment

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. 08-024/2

Classification and Topics

• Classification: Wirtschaft ; Fiscal Policy ; Business Fluctuations; Cycles
• Subject: Optimal fiscal policy ; government spending ; labor market frictions ; unemployment ; stabilization policy ; Finanzpolitik ; Öffentliche Ausgaben ; Konjunktur ; Friktionelle Arbeitslosigkeit ; Wirtschaftliche Anpassung ; Dynamisches Gleichgewicht ; Wohlfahrtstheorie ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Linnemann, Ludger ; Schabert, Andreas
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/86696
• Last update: 10.03.2025, 11:42 AM CET