The remaining parts of the model are in line with the standard medium-scale DSGE model (e.g. Smets and Wouters 2007), embedding nominal price and wage rigidities, investment adjustment cost, monetary policy rule, and so on. Our model consists of 49 equations and 15 structural shocks. The entire model is described in Appendix A.1 and summarized in A.2. Tables 1 and 2 report endogenous variables and structural shocks.

Now, we turn to the illustration on effects of non-wasteful fiscal expansions on unemployment.

### 2.3 Effects of Non-wasteful Fiscal Expansions for Unemployment

How do non-wasteful fiscal expansions affect unemployment? Here, we intuitively explain mechanisms that non-wasteful fiscal expansions may bring additional channels for improvements of unemployment.

Suppose that the economy is in a steady state at the initial period. Real wage, aggregate employment, and aggregate labor supply are determined at A, H and L, respectively. Unemployment U is depicted as the difference between L and H. In addition, for the sake of simplicity of illustration, real wage is assumed to be a constant at A at least in the short-term due to nominal wage and price rigidities.

Figure 2 (b) shows effects of fiscal expansions without EC and PPC (“wasteful” government spending) on unemployment. The standard story goes as follows: Fiscal expansions create aggregate demand, which induces an increase in labor demand. This effect is depicted by the shift of the labor demand curve to the right. This effect is shown as (i) in Figure 2 (b). But forward-looking households will decrease consumption because of anticipation of future tax increases (negative wealth effect). The decrease in private consumption lowers labor demand, which is depicted by the shift of labor demand curve to the left (shown as (ii) in Figure 2(b)). Thus, the effect of increase in aggregate demand will be partly cancelled out by the negative wealth effect. In addition, the decrease in private consumption also causes an incentive to work more (an increase in labor supply), which is shown by the shift of labor supply curve to the right (shown as (iii) in Figure 2 (b)). Meanwhile, real wage adjustment is sluggish due to nominal rigidities. Here, real wage is assumed to remain at A. As a result, aggregate employment is determined at $ H' $ , aggregate labor supply is determined at $ L' $ and unemployment is determined by the difference $ L' $ and $ H' $ . If the increase in labor demand dominates the increase in labor supply, then fiscal stimuli decrease unemployment. Otherwise, fiscal stimuli increase unemployment.

Now, we consider effects of non-wasteful fiscal expansions on unemployment in Figure 2(c). Under “non-wasteful” government spending, several channels are added to the previous story: Fiscal expansions create aggregate demand. Forward-looking households will decrease private consumption from the negative wealth effect. The decrease of private consumption causes an increase in labor supply. Up to this point, effects of fiscal stimuli to unemployment are the same as the previous story.

Suppose that the parameter $ \nu_{g} $ in equation (8) is negative, which corresponds to the case