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School of Economics and Finance

No. 826: Fiscal Stimulus with Learning-By-Doing

Giulio Fella , Queen Mary University of London
Antonello d'Alessandro , University of Melbourne

July 20, 2017

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Using a structural VAR analysis, we document that an increase in government purchases raises private consumption, total factor productivity (TFP) and the real wage. This poses a puzzle for both neoclassical and New-Keynesian models. We extend a standard New-Keynesian model to allow for skill accumulation through past work experience, following Chang, Gomes and Schorfheide (2002). 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 the expected rate of ination and, through the monetary policy rule, the real interest rate. Consumption increases as a result.

J.E.L classification codes: E62, E63

Keywords:Fiscal policy transmission, consumption, real wage