On the fiscal policy for full employment: Theoretical analysis with an overlapping generations model

Abstract

Using an overlapping generations model under monopolistic competition, we consider the existence of involuntary unemployment due to insufficient demand and examine the possibility of achieving full employment through fiscal policy. The main conclusions are as follows: In order to achieve full employment by expanding fiscal spending in a situation where involuntary unemployment exists, it is necessary to run a budget deficit and create government debt. After that, a balanced budget will be required to maintain full employment. Therefore, there is no need to redeem the initial government debt. Similarly, when full employment is achieved by cutting taxes, the direct increase in consumption resulting from the tax cut should be financed by the government debt, and there is no need to redeem it. Not redeeming government bonds means that they will either be non-maturity bonds or that the central bank will buy them.