Universidad Carlos III de Madrid - UC3M
Fiscal Multipliers over the Business Cycle
Author: Pascal Michaillat: CEP Discussion Paper No 1115 January 2012
Thursday 26 March 2015, by Carlos San Juan
This paper illustrates why fiscal policy becomes more effective as unemployment rises in
recessions. The theory is based on the equilibrium unemployment model of Michaillat (forthcoming), in which jobs are rationed in recessions. Fiscal policy takes the form of government spending on public-sector jobs.
Recessions are periods of acute job shortage without much competition for workers among recruiting firms; hiring in the public sector does not crowd out hiring in the private sector much; therefore fiscal policy reduces unemployment effectively.
Formally the fiscal multiplier—the reduction in unemployment
rate achieved by spending one dollar on public-sector jobs—is countercyclical. An implication is that available estimates of the fiscal multiplier, which measure the average
effect of fiscal policy over the business cycle, do not apply in recessions because the multiplier is much higher in recessions than on average