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Employment Prospects and the Propagation of Fiscal Stimulus

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  • Kopiec, Paweł

Abstract

I study a novel channel that amplifies the effects of a rise in government purchases. Fiscal stimulus increases aggregate demand and boosts job creation. The latter improves employment prospects by reducing idiosyncratic unemployment risk faced by households. This, in turn, weakens precautionary motives and raises private consumption which strengthens the initial fiscal impulse. To explore the mechanism, I use a model with uninsured idiosyncratic risk, frictional labor market and sticky prices. Quantitative analysis indicates that magnitude of the employment prospects channel is substantial: its elimination implies that crowding out of aggregate consumption associated with higher government expenditures rises by 47%.

Suggested Citation

  • Kopiec, Paweł, 2018. "Employment Prospects and the Propagation of Fiscal Stimulus," MPRA Paper 85029, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:85029
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    Cited by:

    1. Kopiec, Paweł, 2022. "The government spending multiplier in the Heterogeneous Agent New Keynesian model," European Economic Review, Elsevier, vol. 145(C).
    2. Paweł Kopiec, 2022. "The Aggregate and Distributional Effects of Fiscal Stimuli," Working Papers 2022-070, Warsaw School of Economics, Collegium of Economic Analysis.
    3. Kopiec, Pawel, 2019. "Household Heterogeneity and the Value of Government Spending Multiplier: an Analytical Characterization," MPRA Paper 93499, University Library of Munich, Germany.

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    More about this item

    Keywords

    Heterogeneous Agents; Frictional Markets; Fiscal Stimulus;
    All these keywords.

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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