Strengthening the micro origins of macro multipliers via partial insurance and increasing returns

Abstract Macroeconomic models of government spending often depend on behavioral details with poor microeconomic validity. We propose a model that is more resistant to this critique in an effort to obtain credible estimates of key policy multipliers. Its success derives from the union of two separate but mutually reinforcing transmission mechanisms: unemployment with partial insurance and increasing returns from producer entry. Results show that our dual approach can generate positive consumption multipliers for a calibration choice that is in keeping with external data on the individual consumption cost of unemployment and on the average size of firm markups.