Standard business cycle models face difficulties generating (i) government spending multipliers exceeding unity and (ii) stabilizing effects of government size. Using a simple model with externality in labor supply, we show that a sufficient degree of complementarity between aggregate and private labor supplies is key to reproducing these stylized facts.
Externality; Labor supply; Government spending multiplier; Government size;
- E32: Business Fluctuations • Cycles
- E63: Comparative or Joint Analysis of Fiscal and Monetary Policy • Stabilization • Treasury Policy
Economics Letters, Elsevier, vol. 112, n. 3, September 2011, pp. 273–276