Unemployment Risk and Discretionary Fiscal Spending

Publication: Working/Discussion PaperWU Working Paper

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Abstract

This paper studies the effects of discretionary fiscal policy responses to adverse aggregate shocks. For this, I build a tractable model where households face idiosyncratic unemployment risk in a Search-and-Matching (SaM) labor market with explicit intensive and extensive employment margins. Focusing on the spending side of fiscal stimuli, I investigate transitory increases in Unemployment Insurance (UI) benefits and public purchases. I show that the effects of transitory increases in fiscal spending largely depend on the state of the labor market and the type of adverse shock hitting the economy. At the aggregate level, the most welfare-improving fiscal stimuli appear to be rather small and over a long period. At the idiosyncratic level, welfare improvements are very unequally distributed. Front-loaded increases in fiscal spending may run into supply constraints and have important undesirable consequences. Fiscal stimuli through UI transfers are never Pareto efficient whereas fiscal stimuli through public purchases can be.
Original languageEnglish
PublisherWU Vienna University of Economics and Business
DOIs
Publication statusPublished - Feb 2023

Publication series

SeriesDepartment of Economics Working Paper Series
Number335

WU Working Paper Series

  • Department of Economics Working Paper Series

Keywords

  • Search and matching
  • heterogeneous agents
  • UI transfers
  • unemployment risk
  • and fiscal spending

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