Fiscal Policy in an Unemployment Crisis

Rendahl, Pontus

doi:10.1093/restud/rdv058

Cited by 88 publications

(83 citation statements)

References 75 publications

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“…The reaction of unemployment to monetary policy, however, has not been supported in several European countries, particularly in periphery countries such as Greece, Spain, Italy, and France. Several economists (Rendahl, 2016;Alexius & Holmlund, 2008;Bassanini & Duvall 2006) argue monetary policy can be significantly impotent for persistent unemployment, which is coupled with a liquidity trap. As Delong, Summers, and Ball (2014) argue the liquidity trap intensifies the impact of fiscal policy on real economy and employment.…”

Section: Importance Of the Topicmentioning

confidence: 99%

“…The effectiveness of fiscal policy will increase during the periods of low nominal interest rates and high persistent unemployment rate, and a fiscal policy shock such as an increase in government spending will boost economic activity and reduce unemployment rate, in turn (Rendahl, 2016). …”

Section: Junankar and Madsenmentioning

confidence: 99%

“…Based on our discussion in Section 2 and following several economists (Alexius & Holmlund, 2008;Rendahl, 2016;and Tagkalakis, 2013) we use an econometric model where unemployment rate is a function of monetary policy, fiscal policy, trade policy, and labor market shocks.…”

Section: Ols Techniquementioning

confidence: 99%

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Unemployment Orthodoxy: Fiscal or Monetary Policy? Case Study of France

Anaraki¹

2017

JFE

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France's economy has suffered from an unprecedented unemployment rate of above 10% over the past decade. The topic is widely debated among economists; while monetary economists argue contractionary monetary policy and austerity plans are the roots of high unemployment rate, New Keynesians believe fiscal policy and high corporate tax rates are the roots of problem. Lucas critique conjectures that monetary policy has only short term effects on real variables including unemployment. This study tests the hypothesis whether fiscal policy plays a more important role than monetary policy in shaping unemployment in France. The paper implements several econometric models to find out which group of policy variables is more effective in combating unemployment. Indeed, the study tests the hypothesis whether New Keynesian models have a better prediction power in explaining unemployment rate than New Classical models. Implementing quarterly data for the period of 1980-2015 and using OLS and GMM techniques the study finds out fiscal policy variables are the most important factors in shaping unemployment rate in France, supporting New Keynesian proposition. JEL Classifications: E24, J23, C20, C50

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Section: Importance Of the Topicmentioning

confidence: 99%

Section: Junankar and Madsenmentioning

confidence: 99%

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Unemployment Orthodoxy: Fiscal or Monetary Policy? Case Study of France

Anaraki¹

2017

JFE

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“…Some theories argue that it can decrease consumption through expectations of higher future taxes (the Ricardian equivalence channel discussed in Barro, 1974) and increases in real interest rates (Baxter and King, 1993). Others point to increases in consumption through increases in expected income (Murphy, 2015;Rendahl, 2015), presence of credit-constrained hand-to-mouth consumers (e.g., Galí et al, 2007;Eggertsson and Krugman, 2012), or declines in the real interest rate (e.g., Eggertsson, 2010;Christiano, Eichenbaum, and Rebelo, 2011).…”

Section: What Contributes To Heterogeneity In the Government-spendingmentioning

confidence: 99%

Fiscal Stimulus and Consumer Debt

Demyanyk

Loutskina²,

Murphy³

2016

Working Paper (Federal Reserve Bank of Cleveland)

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In the aftermath of consumer debt-induced recession, policymakers have questioned whether fi scal stimulus is effective during the periods of high consumer indebtedness. This study empirically investigates this question. Using detailed data on Department of Defense spending for the 2006-2009 period, we document that the open-economy relative fi scal multiplier is higher in geographies with higher consumer indebtedness. The results suggest that fi scal policy can mitigate the adverse effect of consumer (over)leverage on real economic output during a recession. We then exploit detailed microdata to evaluate aggregate demand and aggregate supply-side economic mechanisms potentially underlying this result.

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“…4 In addition, in most new-Keynesian models the mechanism behind a larger-than-normal multiplier relies on big changes in ination that we do not observe in the data. See Rendahl (2016) for a discussion of this aspect as well as for a model that does not rely on this mechanism.…”

mentioning

confidence: 99%

Essays on the Great Recession and the Austerity

Guil

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This thesis is devoted to the study of two of the most important macroeconomic events from recent times: the Great Recession of 2008-09, and Austerity in 2010-13.We argue that both phenomena have been primarily demand-driven, with the former taking the form of a synchronized self-fullling panic, and recessions in several advanced countries during the latter being driven by the increased desire of households to save due to cuts in welfare state spending.In Chapter 1, The Great Recession: Divide between Integrated and Less Integrated Countries (joint with Eric van Wincoop and Gang Zhang), we conrm previous evidence about the absence of a monotonic relationship between the decline in growth of countries during the Great Recession and their level of trade or nancial integration, but document instead a strong discontinuous relationship. Countries whose level of economic integration (trade and nance) was above a certain cuto saw a much larger drop in growth than less integrated countries, a nding that is robust to a wide variety of controls. We argue that standard models based on transmission of exogenous shocks across countries cannot explain these facts. Instead, we explain the evidence in the context of a multi-country model with business cycle panics that are endogenously coordinated across countries.In Chapter 2, A Welfare State-based Fiscal Multiplier , we argue that current new-Keynesian theory cannot explain empirical evidence of larger-than-normal scal multipliers during the 2010-13 period if the combination of countries committing to a sizable reduction of public debt and low output growth expectations led agents to believe that austerity measures were permanent. Instead, we explain the evidence in the context of a new-Keynesian model with incomplete markets and heterogeneous households, where the reduced level of public insurance implied by a permanent cut of welfare spending increases incentives to save for precautionary reasons, thus leading to a Paradox-of-Thrift type of recession. Consistent with this view, we nd empirically that the welfare state spending multiplier was signicantly larger than the non-welfare and tax multipliers for advanced countries engaging in scal adjustments over this time period.

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Fiscal Policy in an Unemployment Crisis

Cited by 88 publications

References 75 publications

Unemployment Orthodoxy: Fiscal or Monetary Policy? Case Study of France

Unemployment Orthodoxy: Fiscal or Monetary Policy? Case Study of France

Fiscal Stimulus and Consumer Debt

Essays on the Great Recession and the Austerity

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