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Fiscal policy under involuntary unemployment

Tanaka, Yasuhito (2020): Fiscal policy under involuntary unemployment.

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Abstract

We show the existence of involuntary unemployment based on consumers' utility maximization and firms' profit maximization behavior under monopolistic competition with increasing, decreasing or constant returns to scale technology using a three-periods overlapping generations (OLG) model with a childhood period as well as younger and older periods. We also analyze the effects of fiscal policy financed by tax and budget deficit (or seigniorage) to realize full-employment under a situation with involuntary unemployment. We show the following results. 1) In order to maintain the steady state where employment increases at some positive rate, we need a budget deficit. Therefore, we need budget deficit to realize full-employment from a state with involuntary unemployment (Proposition 1). 2) If the full-employment state is realized, we do not need budget deficit to maintain full-employment (Proposition 2). Additionally we present a game-theoretic interpretation of involuntary unemployment and full-employment.

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