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The Optimal Use of Government Purchases for Stabilization

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  • Pascal Michaillat
  • Emmanuel Saez

Abstract

This paper describes the optimal level of government purchases in the presence of unemployment. The theoretical framework is a general-equilibrium matching model in which government purchases are valuable. When the unemployment gap is zero, the conventional Samuelson formula is valid. Otherwise, optimal government spending deviates from the Samuelson level to fill the unemployment gap partially. Hence, with a positive unemployment multiplier (so that increasing government purchases reduces unemployment), government spending should be higher than the Samuelson level when unemployment is inefficiently high and lower when unemployment is inefficiently low. We characterize the optimal level of stimulus spending. We find that stimulus spending is largest for a moderate unemployment multiplier. With larger multipliers, stimulus spending is smaller because less spending is required to fill the unemployment gap. With smaller multipliers, stimulus spending is smaller because there is more crowding out of private spending by public spending. We also find that stimulus spending increases with the elasticity of substitution between public and private consumption. With a zero elasticity (so that additional public workers dig and fill holes), stimulus spending is zero. With an infinite elasticity (so that private and public workers are perfect substitute), stimulus spending is large enough to fill the unemployment gap completely. Finally, the results hold whether taxes are nondistortionary or distortionary.

Suggested Citation

  • Pascal Michaillat & Emmanuel Saez, 2015. "The Optimal Use of Government Purchases for Stabilization," NBER Working Papers 21322, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21322
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    Cited by:

    1. Pablo D Fajgelbaum & Eduardo Morales & Juan Carlos Suárez Serrato & Owen Zidar, 2019. "State Taxes and Spatial Misallocation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 333-376.
    2. Chugh, Sanjay K. & Lechthaler, Wolfgang & Merkl, Christian, 2018. "Optimal fiscal policy with labor selection," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 142-189.
    3. Giorgio Motta & Raffaele Rossi, 2019. "Optimal Fiscal Policy with Consumption Taxation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(1), pages 139-161, February.
    4. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2018. "A Macroeconomic Approach to Optimal Unemployment Insurance: Theory," American Economic Journal: Economic Policy, American Economic Association, vol. 10(2), pages 152-181, May.
    5. Xu, Kun & Xu, Wenli, 2015. "中国政府消费支出对经济波动的传导机理分析 [Study on Influential Mechanism Between Government Expenditure of Consumption and Economic Fluctuation]," MPRA Paper 70994, University Library of Munich, Germany, revised Dec 2015.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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