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Fiscal Multipliers and the Labour Market in the Open Economy

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  • Faia, Ester

    ()
    (Goethe University Frankfurt)

  • Lechthaler, Wolfgang

    ()
    (Kiel Institute for the World Economy)

  • Merkl, Christian

    ()
    (University of Erlangen-Nuremberg)

Abstract

Several contributions have recently assessed the size of fiscal multipliers both in RBC models and New Keynesian models. None of the studies considers a model with frictional labour markets which is a crucial element, particularly at times in which much of the fiscal stimulus has been directed toward labour market measures. We use an open economy model (more specifically, a currency area calibrated to the European Monetary Union) with labour market frictions in the form of labour turnover costs and workers’ heterogeneity to measure fiscal multipliers. We compute short and long run multipliers and open economy spillovers for five types of fiscal packages: pure demand stimuli and consumption tax cuts return very small multipliers; income tax cuts and hiring subsidies deliver larger multipliers, as they reduce distortions in sclerotic labour markets; short-time work (German "Kurzarbeit") returns negative short-run multipliers, but stabilises employment. Our model highlights a novel dimension through which multipliers operate, namely the labour demand stimulus which occurs in a model with non-walrasian labour markets.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4849.

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Length: 41 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:iza:izadps:dp4849

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Keywords: fiscal packages; labour market frictions; fiscal multipliers;

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  1. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 112-32, March.
  2. Galí, Jordi & López-Salido, David & Vallés, Javier, 2004. "Understanding the effects of government spending on consumption," Working Paper Series, European Central Bank 0339, European Central Bank.
  3. Wolfgang Lechthaler & Christian Merkl & Ester Faia, 2009. "Labor Turnover Costs, Workers’ Heterogeneity and Optimal Monetary Policy," 2009 Meeting Papers, Society for Economic Dynamics 193, Society for Economic Dynamics.
  4. Trabandt, Mathias & Uhlig, Harald, 2006. "How Far Are We From the Slippery Slope? The Laffer Curve Revisited," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5657, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Jooste, Charl & Liu, Guangling (Dave) & Naraidoo, Ruthira, 2013. "Analysing the effects of fiscal policy shocks in the South African economy," Economic Modelling, Elsevier, Elsevier, vol. 32(C), pages 215-224.
  2. Dieter Hundt & Frank-Jürgen Weise & Hagen Lesch & Wolfgang Lechthaler & Christian Merkl, 2012. "Eurokrise, Energiewende, Konjunkturabkühlung: Ende des deutschen Jobwunders?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 65(01), pages 03-13, 01.
  3. Cantore, Cristiano & Levine, Paul & Melina, Giovanni & Yang, Bo, 2012. "A fiscal stimulus with deep habits and optimal monetary policy," Economics Letters, Elsevier, Elsevier, vol. 117(1), pages 348-353.
  4. Totzek, Alexander & Winkler, Roland C., 2010. "Fiscal stimulus in model with endogenous firm entry," MPRA Paper 26829, University Library of Munich, Germany, revised Nov 2010.
  5. Alessia Campolmi & Ester Faia & Roland Winkler, 2010. "Fiscal Calculus in a New Keynesian Model with Matching Frictions," Kiel Working Papers 1602, Kiel Institute for the World Economy.
  6. Roland Winkler & Alexander Totzek, 2011. "Fiscal Stimulus in a Business Cycle Model with Firm Entry," 2011 Meeting Papers 140, Society for Economic Dynamics.
  7. Cristiano Cantore & Paul Levine & Giovanni Melina, 2011. "A Fiscal Stimulus and Jobless Recovery," School of Economics Discussion Papers, School of Economics, University of Surrey 1111, School of Economics, University of Surrey.
  8. Ekkehard Ernst & Uma Rani, 2011. "Understanding unemployment flows," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 27(2), pages 268-294.
  9. Alessia Campolmi & Ester Faia & Roland Winkler, 2011. "Fiscal Calculus in a New Keynesian Model with Labor Market Frictions," MNB Working Papers, Magyar Nemzeti Bank (the central bank of Hungary) 2011/5, Magyar Nemzeti Bank (the central bank of Hungary).

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