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Okun’s Law, V/U and the fiscal multiplier

Author

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  • Jerome Creel

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, ESCP Business School - ESCP Business School)

  • Jonas Kaiser

Abstract

This paper investigates the stabilization property of fiscal policy by revisiting the notion of potential output via the use of Okun's Law including the vacancy-to-unemployment ratio (V/U) to proxy economic slack. We propose new measures of the US fiscal stance based on observable data and transparent targets. Our results suggest that the US actually had a more conservative fiscal stance than official data indicate. This paper also examines fiscal multipliers, which are larger when V/U, rather than the unemployment rate, is used as measure of economic slack. We find that state-dependence of fiscal multipliers is as sensitive to thresholds for bad years than to the slack measure employed in Okun's Law.

Suggested Citation

  • Jerome Creel & Jonas Kaiser, 2024. "Okun’s Law, V/U and the fiscal multiplier," Working Papers hal-04814694, HAL.
    • Handle: RePEc:hal:wpaper:hal-04814694
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-04814694v1
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    File URL: https://sciencespo.hal.science/hal-04814694v1/document
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