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Working Paper Abstract

293.
"New-Keynesian or RBC transmission? The effects of fiscal shocks in labor markets"
by Evi Pappa

Abstract

We study the mechanics of transmission of fiscal shocks to labor markets. We
characterize a set of robust implications following government consumption, investment
and employment shocks in a RBC and a New-Keynesian model and use part of them to
identify shocks in the data. In line with the New-Keynesian story, shocks to government
consumption and investment increase real wages and employment contemporaneously
both in US aggregate and in US state data. The dynamics in response to employment
shocks are mixed, but in many cases are inconsistent with the predictions of the RBC
model.

JEL classification: C11, E12, E32, E62.

Key Words: sticky and flexible prices, labor markets, sign-restrictions, VARs.

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Last updated February 27, 2007