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Shocks and the Unavoidable Road to Higher Taxes and Higher Unemployment

Author

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  • Wouter Denhaan

    (University of Amsterdam)

Abstract

This paper considers a matching model in which multiple steady-state unemployment rates exist if government expenditures and unemployment benefits are high enough. The focus on the extensive margin and a possible transition to a steady state with higher unemployment rates imply that the effect of tax rates can be high even when the elasticity between consumption and leisure is low. The matching friction limits transitions between steady states due to self-fulfilling expectations. After a sufficiently large increase in the unemployment rate and after a large enough increase in the tax burden caused by an exogenous increase in government spending, however, transition towards the high-unemployment steady state is unavoidable in an economy with generous unemployment benefits. (Copyright: Elsevier)

Suggested Citation

  • Wouter Denhaan, 2007. "Shocks and the Unavoidable Road to Higher Taxes and Higher Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 348-366, July.
  • Handle: RePEc:red:issued:06-7
    DOI: 10.1016/j.red.2006.11.002
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Multiple equilibria; Matching friction; Unemployment benefits; Fiscal policy;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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