A theory of countercyclical government-consumption multiplier

Pascal Michaillat

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: I develop a New Keynesian model in which a type of government multiplier doubles when unemployment rises from 5 percent to 8 percent. This multiplier indicates the additional number of workers employed when one worker is hired in the public sector. Graphically, in equilibrium, an upward-sloping quasi-labor supply intersects a downward-sloping labor demand in a (employment, labor market tightness) plane. Increasing public employment stimulates labor demand, which increases tightness and therefore crowds out private employment. Critically, the quasi-labor supply is convex. Hence, when labor demand is depressed and unemployment is high, the increase in tightness and resulting crowding-out are small.

Keywords: multiplier; unemployment; business cycle; job rationing; matching frictions (search for similar items in EconPapers)
JEL-codes: E24 E32 E62 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2012-06-20
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: A Theory of Countercyclical Government-Consumption Multiplier (2012)
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