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How to reduce unemployment: A new policy proposal

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  • Farmer, Roger E.A.

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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  • Farmer, Roger E.A., 2010. "How to reduce unemployment: A new policy proposal," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 557-572, July.
  • Handle: RePEc:eee:moneco:v:57:y:2010:i:5:p:557-572
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    Cited by:

    1. Shafik Hebous, 2011. "The Effects Of Discretionary Fiscal Policy On Macroeconomic Aggregates: A Reappraisal," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 674-707, September.
    2. Jianjun Miao & Pengfei Wang & Lifang Xu, 2016. "Stock market bubbles and unemployment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 273-307, February.
    3. Riccardo Magnani, 2015. "The Solow Growth Model Revisited. Introducing Keynesian Involuntary Unemployment," CEPN Working Papers hal-01203393, HAL.
    4. Marco Guerrazzi, 2012. "Expectations, Employment and Prices: A Suggested Interpretation of the New «Farmerian» Economics," Politica economica, Società editrice il Mulino, issue 3, pages 369-395.
    5. Annalisa Cristini & Piero Ferri & Anna Maria Variato, 2015. "Search Theories and Aggregate Demand," Review of Economics & Finance, Better Advances Press, Canada, vol. 5, pages 55-65, August.
    6. Roger E A Farmer, 2020. "The importance of beliefs in shaping macroeconomic outcomes," Oxford Review of Economic Policy, Oxford University Press, vol. 36(3), pages 675-711.
    7. Florian Hartmann & Matthieu Charpe & Peter Flaschel & Roberto Veneziani, 2016. "A Basic Model of Real-Financial Market Interactions with Heterogeneous Opinion Dynamics," IEER Working Papers 104, Institute of Empirical Economic Research, Osnabrueck University, revised 26 May 2016.
    8. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, March.
    9. Di Caro, Paolo, 2014. "Regional recessions and recoveries in theory and practice: a resilience-based overview," MPRA Paper 60300, University Library of Munich, Germany.
    10. Thomas Habanabakize & Paul-Francois Muzindutsi, 2017. "Analysis of Government Expenditure and Sectoral Employment in the Post-apartheid South Africa: Application of ARDL Model," Journal of Economics and Behavioral Studies, AMH International, vol. 9(2), pages 224-233.
    11. Marco Guerrazzi, 2011. "Search And Stochastic Dynamics In The Old Keynesian Economics: A Rationale For The Shimer Puzzle," Metroeconomica, Wiley Blackwell, vol. 62(4), pages 561-586, November.
    12. Viktar Fedaseyeu & Vitaliy Strohush, 2012. "Loans from the Government, Overinvestment by Households, and Asset Bubbles," Working Papers 443, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    13. Matthieu Charpe & Peter Flaschel & Florian Hartmann & Roberto Veneziani, 2012. "Towards Keynesian DSGD (isequilibrium) Modelling: Real-Financial Market Interactions with Heterogeneous Expectations Dynamics," IMK Working Paper 93-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    14. Phil Armstrong, 2020. "Can Heterodox Economics Make a Difference?," Books, Edward Elgar Publishing, number 19964.
    15. Kumhof, Michael & Laxton, Douglas & Leigh, Daniel, 2014. "To starve or not to starve the beast?," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 1-23.
    16. Piero Ferri & Fabio Tramontana, 2018. "Debt Persistence in a Deflationary Environment: A Regime-Switching Model," Computational Economics, Springer;Society for Computational Economics, vol. 52(2), pages 421-442, August.
    17. Farmer, Roger E.A., 2012. "The stock market crash of 2008 caused the Great Recession: Theory and evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 693-707.
    18. Marco Guerrazzi, 2010. "How to Reduce Unemployment: Notes on Macro-Economic Stability and Dynamics," Discussion Papers 2010/106, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    19. Periklis Gogas & Theophilos Papadimitriou & Emmanouil Sofianos, 2022. "Forecasting unemployment in the euro area with machine learning," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(3), pages 551-566, April.
    20. Charpe, Matthieu & Flaschel, Peter & Hartmann, Florian & Proaño, Christian, 2011. "Stabilizing an unstable economy: Fiscal and monetary policy, stocks, and the term structure of interest rates," Economic Modelling, Elsevier, vol. 28(5), pages 2129-2136, September.

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