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How to reduce unemployment: A new policy proposal

  • Farmer, Roger E.A.

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 5 (July)
Pages: 557-572

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Handle: RePEc:eee:moneco:v:57:y:2010:i:5:p:557-572
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
  2. Robert E. Hall & Paul R. Milgrom, 2005. "The Limited Influence of Unemployment on the Wage Bargain," NBER Working Papers 11245, National Bureau of Economic Research, Inc.
  3. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  4. Tommaso Monacelli & Roberto Perotti, 2008. "Fiscal Policy, Wealth Effects, and Markups," NBER Working Papers 14584, National Bureau of Economic Research, Inc.
  5. Mark Gertler & Antonella Trigari, 2006. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Computing in Economics and Finance 2006 525, Society for Computational Economics.
  6. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  7. P. A. Diamond, 1982. "Money in Search Equilibrium," Working papers 297, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  9. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  10. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  11. Troy Davig & Eric M. Leeper, 2009. "Monetary-Fiscal Policy Interactions and Fiscal Stimulus," NBER Working Papers 15133, National Bureau of Economic Research, Inc.
  12. Benassy, Jean-Pascal, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," Review of Economic Studies, Wiley Blackwell, vol. 42(4), pages 503-23, October.
  13. Luca Sala & Antonella Trigari & Mark Gertler, 2007. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," 2007 Meeting Papers 353, Society for Economic Dynamics.
  14. Roger E. A. Farmer, 2005. "Shooting the Auctioneer," 2005 Meeting Papers 26, Society for Economic Dynamics.
  15. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121.
  16. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  17. Farmer, Roger, 2010. "Expectations, Employment and Prices," OUP Catalogue, Oxford University Press, number 9780195397901, March.
  18. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
  19. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  20. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, 03.
  21. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
  22. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  23. Pissarides, Christopher A, 1984. "Search Intensity, Job Advertising, and Efficiency," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 128-43, January.
  24. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  25. Robert E. Hall, 2005. "Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market," NBER Working Papers 11183, National Bureau of Economic Research, Inc.
  26. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  27. Roger E. A. Farmer, 2007. "Aggregate Demand and Supply," NBER Working Papers 13406, National Bureau of Economic Research, Inc.
  28. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  29. Howitt, Peter & McAfee, R Preston, 1987. "Costly Search and Recruiting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 89-107, February.
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