This paper provides a macroeconomic model that can simultaneously explain output and unemployment multipliers which are consistent with empirical evidence. To this end, this paper has merged and investigated a model with deep habit formation in private and public consumptions and a model with a labour market friction that generates involuntary unemployment stemming from the monopolistic power of differentiated labour services. The model with a baseline calibration seems to produce quantitatively plausible responses of key macroeconomic variables in response to a government expenditure shock.
This work was financially supported by the new faculty research fund of Ajou University. The author is grateful to Chul-in Lee, Jinill Kim, Yongseung Jung, Dukhyun Ryoo, Suk-ha Shin, Hangyu Lee, all seminar participants in Korea Public Finance Network and two anonymous referees. The previous version of the paper was circulated as a Korea Public Finance Network working paper with the title, \u2018Fiscal Multipliers and Dynamics of Labor Markets\u2019.
