Question

Does our baseline model without search produce a multiplier? What assumptions must be made in the model with search to make the mul- tiplier match the larger estimates in the data. [Our model can match the lower estimates without considering search] What types of changes to our current model would make the multiplier bigger? If we consider output today (as opposed to tomorrow) the output we want to increase (by either increasing gov’t spending or issuing tax cuts) how would the addition of binding borrowing constraints increase the multiplier?

Answer 1

When there is no friction with respect to search on the part of consumer, producer or worker, the adjustment is rapid and so the multiplier has no value. Some assumptions that must be made in the model with search to make the multiplier match the larger estimates in the data include thencreased search time by increasing the variety that will increase consumption and so the multiplier value will be higher

If we consider 2 output today the output we want to increase, this will increase the search time and this will increase the productivity of firms. With higher productivity, they will take more time to hire and so the search is high. In this way the addition of binding borrowing constraints would increase the multiplier.