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Fiscal Calculus in a New Keynesian Model with Matching Frictions

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Author Info

  • Alessia Campolmi
  • Ester Faia
  • Roland Winkler

Abstract

The endorsement of expansionary fiscal packages has often been based on the idea that large multipliers can contrast rising unemployment. Is that really the case? We explore those issues in a New Keynesian model in which unemployment arises because of matching frictions. We compare fiscal packages with different targets (pure demand stimuli versus subsidy to cost of hiring) and of government funding (lump sum taxation versus distortionary taxation). We find that in presence of demand stimuli fiscal multipliers are zero and even turn negative when financed with distortionary taxation. On the other side, in a model with a non-Walrasian labor market, policies aimed at reducing labor wedges, such as cost of hiring, are particularly effective in boosting employment and output

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1602.

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Length: 36 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:kie:kieliw:1602

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Keywords: fiscal calculus; taxation; matching frictions;

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References

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Cited by:
  1. Cristiano Cantore & Paul Levine & Giovanni Melina, 2011. "A Fiscal Stimulus and Jobless Recovery," School of Economics Discussion Papers 1111, School of Economics, University of Surrey.
  2. Kaszab, Lorant, 2011. "Fiscal Policy Multipliers in a New Keynesian Model under Positive and Zero Nominal Interest Rate," Cardiff Economics Working Papers E2011/11, Cardiff University, Cardiff Business School, Economics Section.
  3. 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.
  4. Roland Winkler & Alexander Totzek, 2011. "Fiscal Stimulus in a Business Cycle Model with Firm Entry," 2011 Meeting Papers 140, Society for Economic Dynamics.

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