Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86696
Authors: 
Linnemann, Ludger
Schabert, Andreas
Year of Publication: 
2008
Series/Report no.: 
Tinbergen Institute Discussion Paper 08-024/2
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.
Subjects: 
Optimal fiscal policy
government spending
labor market frictions
unemployment
stabilization policy
JEL: 
E62
E32
Document Type: 
Working Paper

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