TABLE 7. Calibration of the labour market
| Home | REA | US | RW | |
| Inverse of the Frisch elasticity of labour supply ζ | 2.00 | 2.00 | 2.00 | 2.00 |
| Matching probability, Ricardian workers, (piW) | 0.3021 | 0.2238 | 0.5292 | 0.3442 |
| Matching probability, HtM workers, (pjW) | 0.2090 | 0.1848 | 0.5385 | 0.2598 |
| Matching probability, firms, (psF) | 0.70 | 0.70 | 0.70 | 0.70 |
| Matching efficiency, Ric. w., (φi,M) | 0.4598 | 0.3958 | 0.6086 | 0.4908 |
| Matching efficiency, HtM w., (φj,M) | 0.3825 | 0.3596 | 0.6139 | 0.4264 |
| Vac. posting cost, Ric. w., (Ψi) | 0.6984 | 0.3336 | 0.3126 | 0.3715 |
| Vac. posting cost, HtM w., (Ψj) | 0.2373 | 0.1953 | 0.1384 | 0.2630 |
| Break-up rate, Ric. w., (δx,i) | 0.0140 | 0.0226 | 0.0271 | 0.0221 |
| Break-up rate, HtM w., (δx,j) | 0.0339 | 0.0276 | 0.0516 | 0.0259 |
| Disutility of labour, Ric. w., (χi) | 1.0270 | 0.6101 | 0.5838 | 0.6677 |
| Disutility of labour, HtM w., (χj) | 1.2732 | 1.3434 | 1.3845 | 1.2745 |
| Matching elasticity, Ric. w., (μi) | 0.50 | 0.50 | 0.50 | 0.50 |
| Matching elasticity, HtM w., (μj) | 0.50 | 0.50 | 0.50 | 0.50 |
| Bargaining power η | 0.50 | 0.50 | 0.50 | 0.50 |
| Replacement ratio, Ric. w., (rrati) | 0.470 | 0.525 | 0.463 | 0.495 |
| Replacement ratio, HtM w., (rratj) | 0.597 | 0.551 | 0.542 | 0.542 |
| Unemployment rate, (un) | 0.0696 | 0.1038 | 0.0605 | 0.0694 |
| Unemployment rate, HtM w., (unj) | 0.1437 | 0.1334 | 0.0918 | 0.0930 |
| Prob. to renegotiate existing wage, Ric. w., (ξw,i) | 0.8879 | 0.8879 | 0.8879 | 0.8879 |
| Prob. to renegotiate existing wage, HtM w., (ξw,j) | 0.8879 | 0.8879 | 0.8879 | 0.8879 |
| Prob. to start job at avg. wage, Ric. w., (κw,i) | 0.8879 | 0.8879 | 0.8879 | 0.8879 |
| Prob. to start job at avg. wage, HtM w., (κw,j) | 0.8879 | 0.8879 | 0.8879 | 0.8879 |
Note: REA=Rest of the euro area; US=United States; RW=Rest of world
To analyse the effects of delays in the delivery of public investment, we simulate a gradual, but permanent debt-financed increase in public investment. To clearly separate the effects of different types of delays, we simulate the increase in public investment without any delays, and then compare this with 2- and 5-year planning delays (time-to-plan). We then repeat the same simulation, but with 2- and 5-year construction delays (time-to-build).12 We conduct the same set of simulations across two models, first in the model without search frictions on the labour market, and second in the otherwise identical model, except that this time the standard labour market is replaced by search frictions.13
It is important to clarify in detail the information structure of the experiments conducted. Before the announcement, the economy is in the steady state, and the
12Note that while the model has a steady-state 2% inflation, we assume that government investment spending is in real terms, as this allows us to compare shocks of the same size across time. In all cases we assume the government borrows when it invests, i.e., there is no front-loading in government borrowing.
13See Appendix A and Appendix B for details of the models.