Optimal Public Expenditure with Inefficient Unemployment

• Pascal Michaillat ^[1] ; Emmanuel Saez ^[2]
  1. [1] Brown University

     Brown University

     City of Providence, Estados Unidos

     
  2. [2] University of California, Berkeley

     University of California, Berkeley

     Estados Unidos

     
• Localización: Review of economic studies, ISSN 0034-6527, Vol. 86, Nº 3, 2019, págs. 1301-1331
• Idioma: inglés
• Texto completo no disponible (Saber más ...)
• Resumen

  • This article proposes a theory of optimal public expenditure when unemployment is inefficient. The theory is based on a matching model. Optimal public expenditure deviates from the Samuelson rule to reduce the unemployment gap (the difference between current and efficient unemployment rates). Such optimal “stimulus spending” is described by a formula expressed with three sufficient statistics: the unemployment gap, the unemployment multiplier (the decrease in unemployment achieved by increasing public expenditure), and the elasticity of substitution between public and private consumption. When unemployment is inefficiently high and the multiplier is positive, the formula yields the following results. (1) Optimal stimulus spending is positive and increasing in the unemployment gap. (2) Optimal stimulus spending is zero for a zero multiplier, increasing in the multiplier for small multipliers, largest for a moderate multiplier, and decreasing in the multiplier beyond that. (3) Optimal stimulus spending is zero if extra public goods have no value, it becomes larger as the elasticity of substitution increases, and it completely fills the unemployment gap if extra public goods are as valuable as extra private goods.