Working Paper: NBER ID: w17562
Authors: Marco Battaglini; Stephen Coate
Abstract: This paper explores the interaction between fiscal policy and unemployment. It develops a dynamic economic model in which unemployment can arise but can be mitigated by tax cuts and public spending increases. Such policies are fiscally costly, but can be financed by issuing government debt. In the context of this model, the paper analyzes the simultaneous determination of fiscal policy and unemployment in long run equilibrium. Outcomes with both a benevolent government and political decision-making are studied. With political decision-making, the model yields a simple positive theory of fiscal policy and unemployment.
Keywords: Fiscal Policy; Unemployment; Government Debt; Political Decision Making
JEL Codes: E6; E62; H3; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax cuts (H29) | Increased private sector hiring (J23) |
| Increased private sector hiring (J23) | Reduced unemployment (J68) |
| Increases in public production (H49) | Public sector jobs (J45) |
| Public sector jobs (J45) | Reduced unemployment (J68) |
| Wage rigidity (J31) | Unemployment (J64) |
| Fiscal policies (tax cuts and increased public sector employment) (E65) | Reduced unemployment (J68) |
| Optimal fiscal policies (E62) | Eliminate unemployment (J68) |
| Government debt (H63) | Achieving fiscal policy outcomes (E62) |
| High levels of government debt (H63) | Increased unemployment (J64) |
| Political constraints (D72) | Efficacy of fiscal policy (E62) |