Fiscal Policy in an Unemployment Crisis

Pontus Rendahl ()

No 9992, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows that large fiscal multipliers arise naturally from equilibrium unemployment dynamics. In response to a shock that brings the economy into a liquidity trap, an expansion in government spending increases output and causes a fall in the unemployment rate. Since movements in unemployment are persistent, the effects of current spending linger into the future, leading to an enduring rise in income. As an enduring rise in income boosts private demand, even a temporary increase in government spending sets in motion a virtuous employment-spending spiral with a large associated multiplier. This transmission mechanism contrasts with the conventional view in which fiscal policy may be efficacious only under a prolonged and committed rise in government spending, which engineers a spiral of increasing inflation.

Keywords: Fiscal multiplier; Liquidity trap; Unemployment inertia (search for similar items in EconPapers)
JEL-codes: E62 J64 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

Downloads: (external link)
https://cepr.org/publications/DP9992 (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: Fiscal Policy in an Unemployment Crisis (2014)
Working Paper: Fiscal Policy in an Unemployment Crisis (2014)
Working Paper: Fiscal policy in an unemployment crisis (2014)
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:9992

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP9992

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 ().