Publication

The endorsement of expansionary fiscal packages has often been based on the idea that large multipliers can contrast rising unemployment. We explore those issues in a New Keynesian model in which unemployment arises because of matching frictions. We compare alternative fiscal packages both in terms of target for the fiscal stimulus and in terms of source of financing. We consider two forms of government spending: a traditional increase in aggregate demand; an increase in firms’ hiring subsidy. Furthermore, we consider various forms of government financing, namely lump sum taxation versus distortionary taxation on labor.