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Employment prospects and the propagation of fiscal stimulus

Paweł Kopiec

No 296, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

Abstract: I study a novel channel that amplifies the effects of a rise in government purchases. To explore the mechanism, I use a model with uninsured idiosyncratic risk, frictional labor market and sticky prices. Fiscal stimulus increases aggregate demand and boosts job creation. The latter improves employment prospects by reducing unemployment risk faced by households. This, in turn, weakens precautionary motives and raises private consumption which strengthens the initial fiscal impulse. Quantitative analysis indicates that magnitude of the employment prospects channel is substantial: without this mechanism, crowding out of aggregate consumption associated with higher government expenditures is three times larger. Interestingly, in contrast to many recent works using heterogeneous agent models, the analyzed channel does not rely on behavior of liquidity constrained, hand-to-mouth agents.

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)
Pages: 44
Date: 2018
New Economics Papers: this item is included in nep-mac
Note: I would like to thank P. Beaudry, D. Caldara, Ł. Drozd, A. Ferriere, P. Michaillat, C. Moser, K. Pytka, P. Rendahl, S. Schmitt-Grohé, L. Tesar, C. Teulings and L. Uren and participants of RES 2017, Search and Matching Annual Meeting in Barcelona and NBP Summer Workshops for helpful discussions and comments at various stages of this project.
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