FISCAL RULES AND UNEMPLOYMENT

Abstract

This paper shows how fiscal policy affects unemployment in a New Keynesian model with search and matching frictions and distortionary taxation. The model is estimated using US data that includes labor market flows and distinct fiscal instruments. Several findings stand out. First, unemployment multipliers for spending and consumption tax cuts are substantial, even though output multipliers turn out to be less than one. Second, multipliers for labor tax cuts are small. Third, fiscal rules enhance the positive effects of discretionary fiscal policy. However, these expansionary effects on the multipliers are modest compared to earlier studies.