A Theory of Countercyclical Government-Consumption Multiplier

Pascal Michaillat

No 9052, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper proposes a dynamic stochastic general equilibrium model in which the government-consumption multiplier doubles when unemployment rises from 5% to 8%. Theoretically, such countercyclicality arises because of a nonlinearity, namely, that labor supply is convex in a labor market tightness-employment diagram. In the model, as government consumption increases, public employment rises, stimulating labor demand. Equilibrium tightness increases, which reduces private employment and partially offsets the increase in public employment. Since labor supply is convex, the increase in tightness is small in recessions but large in expansions. Hence, government consumption reduces unemployment much more in recessions than in expansions.

Keywords: Business cycle; Multiplier; Unemployment (search for similar items in EconPapers)
JEL-codes: E24 E32 E62 (search for similar items in EconPapers)
Date: 2012-07
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://cepr.org/publications/DP9052 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: A theory of countercyclical government-consumption multiplier (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:9052

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP9052

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().