Fiscal Policy Can Reduce Unemployment: But There is a Less Costly and More Effective Alternative

No 15021, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses a model with a continuum of equilibrium steady state unemployment rates to explore the effectiveness of fiscal policy. The existence of multiple steady state equilibria is explained by the presence of search and recruiting costs. I use the model to explain the current financial crisis as a shift to a high unemployment equilibrium, induced by the self-fulfilling beliefs of market participants about asset prices. I ask two questions. 1) Can fiscal policy help us out of the crisis? 2) Is there an alternative to fiscal policy that is less costly and more effective? The answer to both questions is yes.

JEL-codes: E2 E24 (search for similar items in EconPapers)
Date: 2009-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab and nep-mac
Note: EFG
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Citations: View citations in EconPapers (9)

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