Fiscal policy in an unemployment crisis

Pontus Rendahl ()

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

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; zero lower bound; unemployment intertia (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-04-30
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://eprints.lse.ac.uk/58132/ Open access version. (application/pdf)

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)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:58132

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