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Fiscal Policy in an Unemployment Crisis

  • Rendahl, P.

This paper argues that the effectiveness of fiscal policy may increase markedly during periods of low nominal interest rates and high, persistent, unemployment. An increase in government spending boosts economic activity and reduces the unemployment rate both in the present and in the future. As a less disconcerting future spurs a rise in private consumption, unemployment falls even further and triggers an additional rise in private demand, and so on. In a stylized model, I show that the marginal impact of government spending on output is equal to the reciprocal of the elasticity of intertemporal substitution. In a more realistic framework, the effect is somewhat attenuated and displays significant nonlinearities with respect to the depth of the crisis as well as the size of the stimulus package. But in a severe recession with an unemployment rate of eight percent or above, the fiscal multiplier is equal to 1.5.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1211.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1211.

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Date of creation: 28 Feb 2012
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Handle: RePEc:cam:camdae:1211
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Jonas D. M. Fisher & Ryan Peters, 2009. "Using stock returns to identify government spending shocks," Working Paper Series WP-09-03, Federal Reserve Bank of Chicago.
  2. Christopher A. Pissarides, 2007. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," CEP Discussion Papers dp0839, Centre for Economic Performance, LSE.
  3. Emi Nakamura & J?n Steinsson, 2014. "Fiscal Stimulus in a Monetary Union: Evidence from US Regions," American Economic Review, American Economic Association, vol. 104(3), pages 753-92, March.
  4. Alessandro Barattieri & Susanto Basu & Peter Gottschalk, 2010. "Some Evidence on the Importance of Sticky Wages," Boston College Working Papers in Economics 740, Boston College Department of Economics.
  5. Anton Korinek & Alp Simsek, 2014. "Liquidity Trap and Excessive Leverage," IMF Working Papers 14/129, International Monetary Fund.
  6. Daniel J. Wilson, 2012. "Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 251-82, August.
  7. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  8. R. Anton Braun & Lena Mareen Körber & Yuichiro Waki, 2012. "Some unpleasant properties of log-linearized solutions when the nominal rate is zero," Working Paper 2012-05, Federal Reserve Bank of Atlanta.
  9. Alan J. Auerbach & Yuriy Gorodnichenko, 2010. "Measuring the Output Responses to Fiscal Policy," NBER Working Papers 16311, National Bureau of Economic Research, Inc.
  10. Gauti B. Eggertsson, 2009. "What fiscal policy is effective at zero interest rates?," Staff Reports 402, Federal Reserve Bank of New York.
  11. Rendahl, P., 2012. "Fiscal Policy in an Unemployment Crisis," Cambridge Working Papers in Economics 1211, Faculty of Economics, University of Cambridge.
  12. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
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