Repository logo
 

Fiscal Policy in an Unemployment Crisis

Accepted version
Peer-reviewed

Type

Article

Change log

Authors

Karner Rendahl, Pontus  ORCID logo  https://orcid.org/0000-0003-3052-5732

Abstract

This article shows that equilibrium unemployment dynamics can significantly increase the efficacy of fiscal policy. 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 prevail into the future, leading to an enduring rise in income. As an enduring rise in income boosts private demand, an increase in government spending sets in motion a virtuous employment-spending spiral with large effects on macroeconomic aggregates.

Description

Keywords

Journal Title

The Review of Economic Studies

Conference Name

Journal ISSN

1467-937X

Volume Title

83

Publisher

Oxford University Press