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A Theory of Countercyclical Government-Consumption Multiplier

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  • Michaillat, Pascal

Abstract

This paper proposes a dynamic stochastic general equilibrium model in which the government-consumption multiplier doubles when unemployment rises from 5% to 8%. Theoretically, such countercyclicality arises because of a nonlinearity, namely, that labor supply is convex in a labor market tightness-employment diagram. In the model, as government consumption increases, public employment rises, stimulating labor demand. Equilibrium tightness increases, which reduces private employment and partially offsets the increase in public employment. Since labor supply is convex, the increase in tightness is small in recessions but large in expansions. Hence, government consumption reduces unemployment much more in recessions than in expansions.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9052.

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Date of creation: Jul 2012
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Handle: RePEc:cpr:ceprdp:9052

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Keywords: business cycle; multiplier; unemployment;

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Cited by:
  1. Pontus Rendahl, 2014. "Fiscal Policy in an Unemployment Crisis," Cambridge Working Papers in Economics 1405, Faculty of Economics, University of Cambridge.
  2. Jordan Roulleau-Pasdeloup, 2013. "The Productive Government Spending Multiplier, In and Out of The Zero Lower Bound," Working Papers 2013-02, Centre de Recherche en Economie et Statistique.
  3. Ricardo Silva & Vitor Manuel Carvalho & Ana Paula Ribeiro, 2013. "How large are fiscal multipliers? A panel-data VAR approach for the Euro area," FEP Working Papers 500, Universidade do Porto, Faculdade de Economia do Porto.
  4. Shafik Hebous & Tom Zimmermann, 2013. "Cross-Border Effects of Fiscal Consolidations: Estimates Based on Narrative Records," CESifo Working Paper Series 4311, CESifo Group Munich.

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