Dynamic employment and hours effects of government spending shocks

In this paper, we analyze the dynamic behavior of employment and hours work ed per worker in a stochastic general equilibrium model with a matching mec hanism between vacancies and unemployed workers. The model is estimated for the WS using the Generalized Methods of Moments (GMM) estimation technique . An increase in govern ment spending raises hours worked per worker, and c rowds out private consumption due to a negative wealth effect. On the path converging towards the steady state, private consumption is below its long run average and increases, which implies that the interest rate is above it s long run average and declines. The interest rate effect dominates the pur e economic rent effect on the capital value of a hired worker to the firm, causing a reduction of job openings and consequently a decrease in employme nt, These results are contrasted with the predictions of a version of the B urnside, Eichenbaum and Rebelo's labor hoarding model (Burnside et al., Jou rnal of Political Economy 101 (1993) 245-273). (C) 2000 Elsevier Science B. V. All rights reserved. JEL classification: E24; E62; E32; J64.