Unemployment Fiscal Multipliers

55 Pages Posted: 17 Mar 2010

See all articles by Tommaso Monacelli

Tommaso Monacelli

Bocconi University - Department of Economics

Roberto Perotti

Bocconi University - Department of Economics; European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR)

Antonella Trigari

Bocconi University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2010

Abstract

We estimate the effects of fiscal policy on the labor market in US data. An increase in government spending of 1 percent of GDP generates output and unemployment multipliers respectively of about 1.2 per cent (at one year) and 0.6 percentage points (at the peak). Each percentage point increase in GDP produces an increase in employment of about 1.3 million jobs. Total hours, employment and the job finding probability all rise, whereas the separation rate falls. A standard neoclassical model augmented with search and matching frictions in the labor market largely fails in reproducing the size of the output multiplier whereas it can produce a realistic unemployment multiplier but only under a special parameterization. Extending the model to strengthen the complementarity in preferences, to include unemployment benefits, real wage rigidity and/or debt financing with distortionary taxation only worsens the picture. New Keynesian features only marginally magnify the size of the multipliers. When complementarity is coupled with price stickiness, however, the magnification effect can be large.

Keywords: fiscal policy, labor market, unemployment

JEL Classification: D91, E21, E62

Suggested Citation

Monacelli, Tommaso and Perotti, Roberto and Trigari, Antonella, Unemployment Fiscal Multipliers (March 2010). CEPR Discussion Paper No. DP7728. Available at SSRN: https://ssrn.com/abstract=1573433

Tommaso Monacelli (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Roberto Perotti

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Antonella Trigari

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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