Employment prospects and the propagation of fiscal stimulus

Paweł Kopiec ()

Journal of Economic Dynamics and Control, 2020, vol. 117, issue C

Abstract: This paper studies a mechanism that amplifies the effects of a rise in government purchases through private consumption. Fiscal stimulus increases aggregate demand, boosts job creation and, as a consequence, improves job-finding rates. This, in turn, reduces individual unemployment risk faced by households, decreases precautionary motives and crowds private spending in. Additionally, higher job-finding rates affect aggregate labor market flows which raises the ratio between employed and unemployed workers. As the former feature higher spending than the latter then, mechanically, aggregate consumption increases. A calibrated model with uninsured idiosyncratic risk, frictional labor market and sticky prices is used to isolate and to quantify the joint impact of these two forces - the so-called “employment prospects” channel. I find that when it is shut off, the drop in the values of both impact and cumulative multipliers is substantial and ranges from 32% to 38% under various monetary and fiscal policy rules.

Keywords: Heterogeneous agents; Frictional markets; Fiscal stimulus (search for similar items in EconPapers)
JEL-codes: D30 E62 H23 H30 H31 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Employment prospects and the propagation of fiscal stimulus (2018)
Working Paper: Employment Prospects and the Propagation of Fiscal Stimulus (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:117:y:2020:i:c:s0165188920301093

DOI: 10.1016/j.jedc.2020.103941

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