I'm aware of the concept of the multiplier effect, and when I think about it, shouldn't it be possible that government spending on unemployment benefits create a multiplier effect?

  • $\begingroup$ If unemployment is involuntary and unavoidable then that may be true. But otherwise, the effect may be negative as unemployment benefit can increase a potential worker's reservation wage. A different effect is whether higher unemployment benefits discourage excessively risk-averse behaviour by potential workers $\endgroup$ – Henry Jan 16 '17 at 23:13

With monetary offset by the central bank the fiscal multiplier is approximately zero for any government spending.

See eg Why the Fiscal Multiplier is Roughly Zero.

Basically, if any government spending pushes up inflation (or a similar measure targeted by the central bank) the central bank will 'print less money', eg by increasing interest rates. If government austerity were to suppress total spending and thus inflation, the central bank 'prints more money', eg by lowering interest rates or doing more QE.

We can see that happening eg with the American fiscal cliff---the US federal deficit was cut in half, and pundits forecast the end-of-the-world, but if anything job growth accelerated. Similarly, we can already see that Trumps promised extra spending just leads to the FED raising rates. Inflation expectations both from the Feds forecasts and implied by spreads of inflation indexed treasury bonds over convention treasury bonds both stay relatively flat at 2%.

Under a gold standard or a central bank regime that targets things other than inflation or aggregate spending, government expenditures can have a non-zero fiscal multiplier.

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  • $\begingroup$ It is worthy to point out that most macroeconomists would disagree with this characterization, and that the fiscal multipliers that economists are interested in are "ceteris paribus", i.e. keeping monetary policy constant. For an example of a recent, peer-reviewed work on the topic see for example aeaweb.org/articles?id=10.1257/aer.104.3.753 $\endgroup$ – Tobias Jan 18 '17 at 19:24
  • $\begingroup$ I'm not sure about most. But you are right, the topic is controversial. $\endgroup$ – Matthias Jan 19 '17 at 14:41
  • $\begingroup$ The question does not ask about the significance of fiscal multipliers in general, but whether unemployment benefits act similar to other spending. $\endgroup$ – FooBar Jan 21 '17 at 19:46

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