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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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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
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Journal of Economic Literature Classification System: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation)
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J64 - Unemployment: Models, Duration, Incidence, and Job Search
Sets: Departments > Economics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: No. 8610
Date Deposited: 20 Feb 2012 16:25
URL: http://eprints.lse.ac.uk/41958/

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