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Fiscal Calculus in a New Keynesian Model with Matching Frictions

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  • 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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  1. Tobias Cwik & Volker Wieland, 2010. "Keynesian government spending multipliers and spillovers in the euro area," Working Paper Series 1267, European Central Bank.
  2. Trabandt, Mathias & Uhlig, Harald, 2006. "How Far Are We From the Slippery Slope? The Laffer Curve Revisited," CEPR Discussion Papers 5657, C.E.P.R. Discussion Papers.
  3. Merkl, Christian & Faia, Ester & Lechthaler, Wolfgang, 2010. "Fiscal Multipliers and the Labour Market in the Open Economy," Open Access publications from Kiel Institute for the World Economy C3-V3, Kiel Institute for the World Economy.
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  7. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
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  9. Blanchard, J.O., 1989. "The Aggregate Matching Function," Working papers 538, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  11. John F. Cogan & Tobias Cwik & John B. Taylor & Volker Wieland, 2009. "New Keynesian versus Old Keynesian Government Spending Multipliers," Working Paper Series 1090, European Central Bank.
  12. Krause, M.U. & Lubik, T.A., 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Discussion Paper 2003-113, Tilburg University, Center for Economic Research.
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Cited by:
  1. Totzek, Alexander & Winkler, Roland C., 2010. "Fiscal stimulus in a model with endogenous firm entry," Economics Working Papers 2010,05, Christian-Albrechts-University of Kiel, Department of Economics.
  2. Cristiano Cantore & Paul Levine & Giovanni Melina, 2013. "A Fiscal Stimulus and Jobless Recovery," IMF Working Papers 13/17, International Monetary Fund.
  3. Roland Winkler & Alexander Totzek, 2011. "Fiscal Stimulus in a Business Cycle Model with Firm Entry," 2011 Meeting Papers 140, Society for Economic Dynamics.
  4. 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.

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