DP5313 New-Keynesian or RBC Transmission? The Effects of Fiscal Shocks in Labour Markets

Author(s): Evi Pappa
Publication Date: October 2005
Keyword(s): labour markets, sign-restrictions, sticky and flexible prices, VARs
JEL(s): C11, E12, E32, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5313

We study the mechanics of transmission of fiscal shocks to labour 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.