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Labor Tax Reforms, Cross-Country Coordination, and the Monetary Policy Stance in the Euro Area: A Structural Model-Based Approach

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  • Pascal Jacquinot

    (European Central Bank)

  • Matija Lozej

    (Central Bank of Ireland)

  • Massimiliano Pisani

    (Bank of Italy)

Abstract

We evaluate the effects of permanently reducing labor tax rates in the euro area (EA) by simulating a large-scale openeconomy dynamic general equilibrium model. The model features the EA as a monetary union, split into two regions (home and the rest of the EA, or REA), the United States, and the rest of the world, region-specific labor markets with search and matching frictions, and public employment. Our results are as follows. First, a permanent reduction in labor tax rates in the home region would have stimulating effects on domestic economic activity and employment. Second, reducing labor tax rates simultaneously in both home and REA would have additional expansionary effects on the home region. Third, the short-run macroeconomic effectiveness of the EAwide tax reduction is enhanced if the EA monetary policy is accommodating.

Suggested Citation

  • Pascal Jacquinot & Matija Lozej & Massimiliano Pisani, 2018. "Labor Tax Reforms, Cross-Country Coordination, and the Monetary Policy Stance in the Euro Area: A Structural Model-Based Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 65-140, June.
  • Handle: RePEc:ijc:ijcjou:y:2018:q:2:a:2
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    Cited by:

    1. Bielecki, Marcin & Stähler, Nikolai, 2018. "Labor tax reductions in Europe: The role of property taxation," Discussion Papers 30/2018, Deutsche Bundesbank.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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