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Fiscal Multipliers and the Labour Market in the Open Economy

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  • Ester Faia
  • Wolfgang Lechthaler
  • Christian Merkl

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 on the EMU) 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 cut 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 Kiel Institute for the World Economy in its series Kiel Working Papers with number 1592.

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Length: 37 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:kie:kieliw:1592

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

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  1. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
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Citations

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Cited by:
  1. 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.
  2. Cristiano Cantore & Paul Levine & Giovanni Melina & Bo Yang, 2012. "A Fiscal Stimulus with Deep Habits and Optimal Monetary Policy," School of Economics Discussion Papers 0512, School of Economics, University of Surrey.
  3. Alessia Campolmi & Ester Faia & Roland Winkler, 2011. "Fiscal Calculus in a New Keynesian Model with Labor Market Frictions," MNB Working Papers 2011/5, Magyar Nemzeti Bank (the central bank of Hungary).
  4. Ekkehard Ernst & Uma Rani, 2011. "Understanding unemployment flows," Oxford Review of Economic Policy, Oxford University Press, vol. 27(2), pages 268-294.
  5. Roland Winkler & Alexander Totzek, 2011. "Fiscal Stimulus in a Business Cycle Model with Firm Entry," 2011 Meeting Papers 140, Society for Economic Dynamics.
  6. Cristiano Cantore & Paul Levine & Giovanni Melina, 2013. "A Fiscal Stimulus and Jobless Recovery," IMF Working Papers 13/17, International Monetary Fund.
  7. 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.
  8. 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.
  9. Jooste, Charl & Liu, Guangling (Dave) & Naraidoo, Ruthira, 2013. "Analysing the effects of fiscal policy shocks in the South African economy," Economic Modelling, Elsevier, vol. 32(C), pages 215-224.

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