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Fiscal multipliers over the business cycle

Michaillat, Pascal (2011) Fiscal multipliers over the business cycle. Discussion Paper, No. 8610. Centre for Economic Policy Research, London, UK.

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Identification Number: No. 8610

Abstract

This paper develops a theory characterizing the effects of fiscal policy on unemployment over the business cycle. The theory is based on a model of equilibrium unemployment in which jobs are rationed in recessions. Fiscal policy in the form of government spending on public-sector jobs reduces unemployment, especially during recessions: the fiscal multiplier---the reduction in unemployment rate achieved by spending one dollar on public-sector jobs---is positive and countercyclical. Although the labor market always sees vast flows of workers and a great deal of matching, recessions are periods of acute job shortage without much competition for workers among recruiting firms. Hence hiring in the public sector reduces unemployment effectively because it does not crowd out hiring in the private sector much. An implication is that empirical studies should control for the state of the economy when fiscal policies are implemented to estimate accurately the amplitude of fiscal multipliers in recessions.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.cepr.org/default_static.htm
Additional Information: © 2011 The Author
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Sets: Departments > Economics
Collections > Economists Online
Date Deposited: 20 Feb 2012 16:25
Last Modified: 20 Feb 2012 16:25
URI: http://eprints.lse.ac.uk/id/eprint/41958

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