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Fiscal Policy Can Reduce Unemployment: But There is a Less Costly and More Effective Alternative

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Roger E. A. Farmer

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Abstract

This paper uses a model with a continuum of equilibrium steady state unemployment rates to explore the effectiveness of fiscal policy. The existence of multiple steady state equilibria is explained by the presence of search and recruiting costs. I use the model to explain the current financial crisis as a shift to a high unemployment equilibrium, induced by the self-fulfilling beliefs of market participants about asset prices. I ask two questions. 1) Can fiscal policy help us out of the crisis? 2) Is there an alternative to fiscal policy that is less costly and more effective? The answer to both questions is yes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15021.

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Date of creation: May 2009
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Handle: RePEc:nbr:nberwo:15021

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E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution

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This page was last updated on 2009-11-25.

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