IDEAS home Printed from https://ideas.repec.org/p/cfm/wpaper/1515.html
   My bibliography  Save this paper

The Optimal Use of Government Purchases for Macroeconomic Stabilization

Author

Listed:
  • Pascal Michaillat

    () (Economics Department London School of Economics (LSE)
    Centre for Macroeconomics (CFM))

  • Emmanuel Saez

    () (Department of Economics University of California-Berkeley)

Abstract

This paper extends Samuelson’s theory of optimal government purchases by considering the contribution of government purchases to macroeconomic stabilization. We consider a matching model in which unemployment can be too high or too low. We derive a sufficient-statistics formula for optimal government purchases. Our formula is the Samuelson formula plus a correction term proportional to the government-purchases multiplier and the gap between actual and efficient unemployment rate. Optimal government purchases are above the Samuelson level when the correction term is positive—for instance, when the multiplier is positive and unemployment is inefficiently high. Our formula indicates that US government purchases, which are mildly countercyclical, are optimal under a small multiplier of 0.03. If the multiplier is larger, US government purchases are not countercyclical enough. Our formula implies significant increases in government purchases during slumps. For instance, with a multiplier of 0.5 and other statistics calibrated to the US economy, when the unemployment rate rises from the US average of 5.9% to 9%, the optimal government purchases-output ratio increases from 16.6% to 19.8%. However, the optimal ratio increases less for multipliers above 0.5 because with higher multipliers, the unemployment gap can be filled with fewer government purchases. For instance, with a multiplier of 2, the optimal ratio only increases from 16.6% to 17.6%.

Suggested Citation

  • Pascal Michaillat & Emmanuel Saez, 2015. "The Optimal Use of Government Purchases for Macroeconomic Stabilization," Discussion Papers 1515, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1515
    as

    Download full text from publisher

    File URL: http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2015/CFMDP2015-15-Paper.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. repec:nbr:nberch:13342 is not listed on IDEAS
    2. Gali­, Jordi & Monacelli, Tommaso, 2008. "Optimal monetary and fiscal policy in a currency union," Journal of International Economics, Elsevier, vol. 76(1), pages 116-132, September.
    3. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
    4. 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..
    5. Pascal Michaillat & Emmanuel Saez, 2015. "Aggregate Demand, Idle Time, and Unemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 130(2), pages 507-569.
    6. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    7. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, March.
    8. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    9. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
    10. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
    11. Mikhail Golosov & Maxim Troshkin & Aleh Tsyvinski, 2011. "Optimal Taxation: Merging Micro and Macro Approaches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 147-174, August.
    12. Raj Chetty, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 451-488, May.
    13. Robert E. Hall, 2009. "By How Much Does GDP Rise If the Government Buys More Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
    14. Robert E. Hall, 2005. "Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 397-407, August.
    15. Narayana R. Kocherlakota, 2010. "The New Dynamic Public Finance," Economics Books, Princeton University Press, edition 1, number 9222.
    16. Mikhail Golosov & Aleh Tsyvinski, 2015. "Policy Implications of Dynamic Public Finance," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 147-171, August.
    17. Pascal Michaillat, 2014. "A Theory of Countercyclical Government Multiplier," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(1), pages 190-217, January.
    18. 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 753-792, March.
    19. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-685, September.
    20. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    21. Robert J. Barro & Charles J. Redlick, 2011. "Macroeconomic Effects From Government Purchases and Taxes," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 51-102.
    22. 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, Oxford University Press, vol. 117(4), pages 1329-1368.
    23. John B. Taylor, 2011. "An Empirical Analysis of the Revival of Fiscal Activism in the 2000s," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 686-702, September.
    24. 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.
    25. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
    26. Roberts, Kevin W S, 1982. "Desirable Fiscal Policies under Keynesian Unemployment," Oxford Economic Papers, Oxford University Press, vol. 34(1), pages 1-22, March.
    27. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "A Macroeconomic Theory of Optimal Unemployment Insurance," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xu, Kun & Xu, Wenli, 2015. "中国政府消费支出对经济波动的传导机理分析
      [Study on Influential Mechanism Between Government Expenditure of Consumption and Economic Fluctuation]
      ," MPRA Paper 70994, University Library of Munich, Germany, revised Dec 2015.
    2. Owen Zidar & Juan Carlos Serrato & Eduardo Morales & Pablo Fajgelbaum, 2015. "State Taxes and Spatial Misallocation," 2015 Meeting Papers 877, Society for Economic Dynamics.

    More about this item

    Keywords

    Government Purchases; Business Cycles; Multiplier; Unemployment; Matching;

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cfm:wpaper:1515. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martin Hannon). General contact details of provider: http://edirc.repec.org/data/cmlseuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.