Resource title

The Effects of fiscal policy on consumption and employment: theory and evidence

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This paper compares the dynamic impact of fiscal policy on macroeconomic variables implied by a large class of general equilibrium models with the empirical results from an identified vector autoregression. In the data the authors find that positive innovations in government spending are followed by strong and persistent increases in consumption and employment. They compare these findings to several variations of a standard real business cycle model and they find that the positive conditional correlation in the responses of employment and consumption cannot be matched by the model under plausible assumptions for the values of the calibration parameters.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2000/2000-78.pdf

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