Spatial Variations in Unemployment and Inflation: Some Implications for Fiscal Policy

Abstract

In this paper we consider the spatial dispersion of unemployment vis-à-vis that of inflation and the implication of this relative dispersion for fiscal policy. Two empirical tests yield results that are consistent with our a priori expectations that inflation is more evenly distributed throughout the economy (i.e., less dispersed spatially) than is unemployment. Using a simple short-run model, we argue that tax policy should be geared to a price stability objective and expenditure policy to a full employment objective. Consequently, the Phillips curve dilemma could be lessened by the appropriate use of tax and expenditure policy.