Fiscal policy can reduce unemployment

"This paper uses a model with a continuum of equilibrium unemployment rates to explore the effectiveness of fiscal policy. The existence of multiple steady state unemployment rates is explained by the absence of markets for the inputs to a search technology for matching unemployed workers with vacant jobs. I explain the current financial crisis as a shift to a high unemployment equilibrium, induced by the self-fulfilling beliefs of market participants about asset prices. Using this model, I ask two questions. 1) Can fiscal policy help us out of the crisis? 2) Is there an alternative to fiscal policy that is less costly and more effective? The answer to both questions is yes"--National Bureau of Economic Research web site.