Fiscal Stimulus With Learning‐by‐doing

Abstract

Using a Bayesian structural vector autoregression analysis, we document that an increase in government purchases raises private consumption, the real wage, and total factor productivity (TFP) while reducing inflation. These three facts are hard to reconcile with both neoclassical and New Keynesian models. We extend a standard New Keynesian model to allow for skill accumulation through past work experience. An increase in government spending increases hours and induces skill accumulation and higher measured TFP and real wages in subsequent periods. Future marginal costs fall lowering expected inflation and, through the monetary policy rule, the real interest rate. Consumption increases as a result.

The Effects of Government Spending in the Eurozone

“…is crowding-in of private investment can be rationalized by a strong and persistent rise in labor productivity and total factor productivity. us, our evidence points towards strong positive supply-side e ects of government spending changes, in line with recent evidence by Auerbach et al (2020), D'Alessandro et al (2019, and Jørgensen and Ravn (2020). Furthermore, the scal stimulus induces a signi cant rise in durable consumption (measured by the number of motor vehicles) together with higher real wages and an increase (decrease) in the labor share (markup).…”

Hysteresis and full employment in a small open economy

“…Figure4shows the change in short-run dynamics in the domestic economy when hysteresis and credit constraints are incorporated into the model. Fiscal stimulus increases output, consumption and productivity while actually reducing inflation as in the empirical evidence presented for the US economy by D'Alessandro et al (2019), and models that incorporate 'learning by doing' in the production technology includingEngler andTervala (2018) andD'Alessandro et al (2019). With coordinated fiscal stimulus domestic consumption and output are significantly higher than they would have been without fiscal stimulus.…”

“…In response to these observations, an emerging literature has explored the fiscal (Engler and Tervala, 2018;D'Alessandro et al, 2019) and monetary policy (Reifschneider et al, 2015;Moran and Queralto, 2018;Acharya et al, 2019;Bianchi et al, 2019;Garga and Singh, 2019;and Jordá et al, 2020) consequences of output hysteresis. Although, none of these papers have focused on the small open economy setting.…”

Questioning the Puzzle: Fiscal Policy, Exchange Rate and Inflation

“…However, the empirical literature finds mixed results. On inflation, while Edelberg et al (1999), Zeev and Pappa (2017) and Caldara and Kamps (2017) find that a government spending shock is inflationary, Fatás and Mihov (2001b), Canzoneri et al (2002), Mountford and Uhlig (2009), Dupor and Li (2015), Ricco et al (2016), Jorgensen andRavn (2019) andD'Alessandro et al (2019) find that the same shock decreases prices/inflation.…”

“…Empirically, however, most of the evidence pointed towards an increase in private consumption and a fall in prices in response to a positive government spending shock. This mismatch between theory and empirics has been shaping theoretical studies, which tried to rationalize the empirical findings (see, for example, Basu and S. Kimball, 2003, Linnemann, 2006, Ravn et al, 2006, Galí et al, 2007 and more recently Jorgensen andRavn, 2019 andD'Alessandro et al, 2019). A similar contrast between theoretical predictions and empirical evidence drove also the theoretical literature looking at the impact of fiscal policy in open economies.…”