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Tax reform and labour-market performance in the euro area - a simulation-based analysis using the New Area-Wide Model

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Author Info
Günter Coenen () (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Peter McAdam () (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Roland Straub () (Directorate General International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

In this paper, we employ a calibrated two-country version of the New Area-Wide Model (NAWM) currently under development at the European Central Bank to examine the potential benefits and spillovers of reducing labour-market distortions caused by euro area tax structures. Our analysis shows that lowering tax distortions to levels prevailing in the United States would result in an increase in hours worked and output by more than 10 percent. At the same time, tax reductions would have positive spillovers to the euro area’s trade partners, bolstering the case for tax reforms from a global perspective. Finally, we illustrate that, in the presence of heterogeneous households, distributional effects may be of importance when gauging the impact of tax reforms. JEL Classification: E32, E62.

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Paper provided by European Central Bank in its series Working Paper Series with number 747.

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Length: 71 pages
Date of creation: Apr 2007
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Handle: RePEc:ecb:ecbwps:20070747

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Related research
Keywords: DSGE modelling; limited asset-market participation; fiscal policy; tax reform; euro area.;

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