Essays on Macroeconomics and Labor Markets

Neil Mehrotra
Chapter 1 of my dissertation focuses on the effectiveness of fiscal policy in stabilizing the business cycle. Both government purchases and transfers figure prominently in the use of fiscal policy for counteracting recessions. However, existing representative agent models including the neoclassical and New Keynesian benchmark rule out transfers by assumption. This paper provides a role for transfers by building a borrower-lender model with equilibrium credit spreads and monopolistic
more » ... The model demonstrates that a broad class of deficit-financed government expenditures can be expressed in terms of purchases and transfers. With flexible prices and in the absence of wealth effects on labor supply, transfers and purchases have no effect on aggregate output and employment. Under sticky prices and no wealth effects, fiscal policy is redundant to monetary policy. Alternatively, in the presence of wealth effects, multipliers for both purchases and transfers will depend on the behavior of credit spreads, but purchases deliver a higher output multiplier to transfers under reasonable calibrations due to its larger wealth effect on labor supply. When the zero lower bound is binding, both purchases and transfers are effective in counteracting a recession, but the size of the transfer multiplier relative to the purchases multiplier is increasing in the debt-elasticity of the credit spread. The second chapter of my dissertation examines the relationship between shifts in the Beveridge curve, sector-specific shocks and monetary policy. In this joint work with Dmitriy Sergeyev, we document a significant correlation between shifts in the US Beveridge curve in postwar data and periods of elevated sectoral shocks. We provide conditions under which sector-specific shocks in a multisector model augmented with labor market search frictions generate outward shifts in the Beveridge curve and raise the natural rate of unemployment. Consistent with empirical evidence, our model also generates cyclical movements in aggregate mat [...]
doi:10.7916/d87m0g6w fatcat:n6ehl6iz45bfxhqamh3fg2k2z4