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Employment and growth in Europe and the US--the role of fiscal policy composition

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  • Tine Dhont
  • Freddy Heylen

Abstract

We construct a simple endogenous growth model to analyse the relationship between the composition of fiscal policy, economic growth and employment. The government sets different tax rates on labour income, capital income, and private consumption to finance productive expenditures, utility-enhancing consumption expenditures, and transfers related to structural non-employment. Our model is able to explain the different employment and growth records of European countries and the US since the 1990s. We use the model to investigate the strength of the effects of various fiscal policy shocks on steady state employment and growth. We also develop the transitional dynamics for many variables, including welfare. Our results highlight the trade-offs that may occur between performance indicators, and between the short and the long-run. Copyright 2009 Oxford University Press 2008 All rights reserved, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 61 (2009)
Issue (Month): 3 (July)
Pages: 538-565

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Handle: RePEc:oup:oxecpp:v:61:y:2009:i:3:p:538-565

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  1. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, Elsevier, vol. 74(2), pages 171-190, November.
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  7. Richard B. Freeman & Ronald Schettkat, 2005. "Marketization of household production and the EU-US gap in work," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 20(41), pages 6-50, 01.
  8. Peter Lindert, 2004. "Social Spending and Economic Growth," Challenge, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 47(4), pages 6-16, July.
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  10. Lindbeck, Assar, 1982. "Tax Effects versus Budget Effects on Labor Supply," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 20(4), pages 473-89, October.
  11. C. Denis & K. Mc Morrow & W. R�ger & R. Veugelers, 2005. "The Lisbon Strategy and the EU's structural productivity problem," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 221, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  12. Karras, Georgios, 1994. "Government Spending and Private Consumption: Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 26(1), pages 9-22, February.
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  14. T. Dhont & F. Heylen, 2004. "Fiscal Policy, Employment And Growth: Why Is Continental Europe Lagging Behind?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 04/275, Ghent University, Faculty of Economics and Business Administration.
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Citations

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Cited by:
  1. R. Schoonackers & F. Heylen, 2011. "Fiscal Policy and TFP in the OECD: A Non-Stationary Panel Approach," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 11/701, Ghent University, Faculty of Economics and Business Administration.
  2. Tim Buyse & Freddy Heylen & Renaat Van de Kerckhove, 2013. "Pension reform, employment by age, and long-run growth," Journal of Population Economics, Springer, Springer, vol. 26(2), pages 769-809, April.
  3. Pier Carlo Padoan, 2010. "Fiscal Policy in the Crisis: Impact, Sustainability, and Long-Term Implications," Working Papers id:3036, eSocialSciences.
  4. T. Buyse & F. Heylen & R. Van De Kerckhove, 2011. "Pension reform, employment by age, and long-run growth in OECD countries," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 11/719, Ghent University, Faculty of Economics and Business Administration.
  5. Heylen Freddy & Van de Kerckhove Renaat, 2013. "Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 13(1), pages 55, October.
  6. Tino Berger & Freddy Heylen, 2011. "Differences in Hours Worked in the OECD: Institutions or Fiscal Policies?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43(7), pages 1333-1369, October.
  7. T. Buyse & F. Heylen, 2012. "Leaving the empirical (battle)ground: Output and welfare effects of fiscal consolidation in general equilibrium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 12/826, Ghent University, Faculty of Economics and Business Administration.
  8. T. Buyse & F. Heylen & R. Van De Kerckhove, 2012. "Pension reform in an OLG model with heterogeneous abilities," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 12/810, Ghent University, Faculty of Economics and Business Administration.

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