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A numerical approach to fiscal policy, unemployment, and growth in Europe

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Author Info
Francesco Daveri (University of Parma)
Marco Maffezzoli (Bocconi University)

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Abstract

We calibrate an infinite-horizon model with endogenous growth and unemployment on actual data from the largest countries in the European Union. Two types of balanced-budget fiscal policy experiments are studied. First, the effects of separately changing the tax rates on capital, labor and subsidies, as well as the replacement rates, are analyzed, assuming offsetting changes in lump-sum transfers. Second, we rule out offsetting transfers and study how effective is the cut in labor taxes when financed either raising capital taxation or reducing unemployment subsidies. We find two main results: (i) with lump-sum transfers, reducing labor taxes and unemployment subsidies is beneficial to both employment and growth, while cutting capital taxes is less beneficial; (ii) without transfers, cutting labor taxes is more effective when financed by a (modest) cut in unemployment subsidies rather than by a (sizable) increase in capital taxes. Sensitivity analysis shows that our results are robust to changes in a vast range of parameter values.

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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0004010.

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Length: 45 pages
Date of creation: 31 May 2000
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Handle: RePEc:wpa:wuwpma:0004010

Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on A4; pages: 45; figures: included. Zip file containing separated pdf files for body, tables, and figures
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Related research
Keywords: Fiscal Policy Taxation Europe Unemployment Growth Numerical Simulation Trade Union

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Find related papers by JEL classification:
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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  1. Xavier Raurich & Hector Sala & Valeri Sorolla, . "Employment and public capital in Spain," Working Papers 2001-21, FEDEA. [Downloadable!]
    Other versions:
  2. Francesco Zanetti, 2003. "Non-Walrasian Labor Market and the European Business Cycle," Boston College Working Papers in Economics 574, Boston College Department of Economics, revised 20 May 2004. [Downloadable!]
  3. Marco Maffezzoli, 2001. "Non-Walrasian Labor Markets and Real Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 860-892, October. [Downloadable!] (restricted)
    Other versions:
  4. John Kennan, 2001. "Uniqueness of Positive Fixed Points for Increasing Concave Functions on Rn: An Elementary Result," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 893-899, October. [Downloadable!] (restricted)
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