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Unemployment Fiscal Multipliers

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  • Monacelli, Tommaso
  • Perotti, Roberto
  • Trigari, Antonella

Abstract

We estimate the effects of fiscal policy on the labor market in US data. An increase in government spending of 1 percent of GDP generates output and unemployment multipliers respectively of about 1.2 per cent (at one year) and 0.6 percentage points (at the peak). Each percentage point increase in GDP produces an increase in employment of about 1.3 million jobs. Total hours, employment and the job finding probability all rise, whereas the separation rate falls. A standard neoclassical model augmented with search and matching frictions in the labor market largely fails in reproducing the size of the output multiplier whereas it can produce a realistic unemployment multiplier but only under a special parameterization. Extending the model to strengthen the complementarity in preferences, to include unemployment benefits, real wage rigidity and/or debt financing with distortionary taxation only worsens the picture. New Keynesian features only marginally magnify the size of the multipliers. When complementarity is coupled with price stickiness, however, the magnification effect can be large.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7728.

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Date of creation: Mar 2010
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Handle: RePEc:cpr:ceprdp:7728

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Keywords: fiscal policy; labor market; unemployment;

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References

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Citations

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Cited by:
  1. Brückner, Markus & Pappa, Evi, 2010. "Fiscal expansions affect unemployment, but they may increase it," CEPR Discussion Papers 7766, C.E.P.R. Discussion Papers.
  2. Melina, Giovanni & Villa, Stefania, 2012. "Fiscal policy and lending relationships," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/348272, Katholieke Universiteit Leuven.
  3. Javier Andrés & José Boscá & Francisco Ferri, 2012. "Household leverage and fiscal multipliers," Banco de España Working Papers 1215, Banco de España.
  4. Steinar Holden & Victoria Sparrman, 2011. "Do Government Purchases Affect Unemployment?," CESifo Working Paper Series 3482, CESifo Group Munich.
  5. Ryuta Ray Kato & Hiroaki Miyamoto, 2013. "Fiscal Stimulus in an Endogenous Job Separation Model," Working Papers EMS_2013_02, Research Institute, International University of Japan.
  6. Oh, Hyunseung & Reis, Ricardo, 2011. "Targeted transfers and the fiscal response to the great recession," CEPR Discussion Papers 8239, C.E.P.R. Discussion Papers.
  7. Levine, Paul & McAdam, Peter & Pearlman, Joseph, 2012. "Probability models and robust policy rules," European Economic Review, Elsevier, vol. 56(2), pages 246-262.
  8. Daniel J. Wilson, 2010. "Fiscal spending multipliers: evidence from the 2009 American Recovery and Reinvestment Act," Working Paper Series 2010-17, Federal Reserve Bank of San Francisco.
  9. David Andolfatto, 2010. "Fiscal multipliers in war and in peace," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 121-128.
  10. Atanas Hristov, 2010. "The High Sensitivity of Employment to Agency Costs: The Relevance of Wage Rigidity," SFB 649 Discussion Papers SFB649DP2010-044, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  11. Tommaso Monacelli & Roberto Perotti & Antonella Trigari, 2011. "Taxes and the Labor Market," Working Papers Central Bank of Chile 623, Central Bank of Chile.

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