Skip to Main content Skip to Navigation
Preprints, Working Papers, ...

Taking off into the Wind: Unemployment Risk and State-Dependent Government Spending Multipliers

Abstract : We propose a model with involuntary unemployment, incomplete markets, and nominal rigidity, in which the effects of government spending are state-dependent. An increase in government purchases raises aggregate demand, tightens the labor market and reduces unemployment. This in turn lowers unemployment risk and thus precautionary saving, leading to a larger response of private consumption than in a model with perfect insurance. The output multiplier is further amplified through a composition effect, as the fraction of high-consumption households in total population increases in response to the spending shock. These features, along with the matching frictions in the labor market, generate significantly larger multipliers in recessions than in expansions. As the pool of job seekers is larger during downturns than during expansions, the concavity of the job-finding probability with respect to market tightness implies that an increase in government spending reduces unemployment risk more in the former case than in the latter, giving rise to countercyclical multipliers.
Document type :
Preprints, Working Papers, ...
Complete list of metadata

Cited literature [53 references]  Display  Hide  Download

https://halshs.archives-ouvertes.fr/halshs-02452369
Contributor : Nelly Wirth Connect in order to contact the contributor
Submitted on : Thursday, January 23, 2020 - 2:29:59 PM
Last modification on : Thursday, May 6, 2021 - 4:19:44 PM
Long-term archiving on: : Friday, April 24, 2020 - 2:14:53 PM

File

2002.pdf
Files produced by the author(s)

Identifiers

  • HAL Id : halshs-02452369, version 1

Citation

Julien Albertini, Stéphane Auray, Hafedh Bouakez, Aurélien Eyquem. Taking off into the Wind: Unemployment Risk and State-Dependent Government Spending Multipliers. 2020. ⟨halshs-02452369⟩

Share

Metrics

Record views

102

Files downloads

288