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Fiscal Multipliers and the Labour Market in the Open Economy

  • Faia, Ester

    ()

    (Goethe University Frankfurt)

  • Lechthaler, Wolfgang

    ()

    (Kiel Institute for the World Economy)

  • Merkl, Christian

    ()

    (University of Erlangen-Nuremberg)

Several contributions have recently assessed the size of fiscal multipliers both in RBC models and New Keynesian models. None of the studies considers a model with frictional labour markets which is a crucial element, particularly at times in which much of the fiscal stimulus has been directed toward labour market measures. We use an open economy model (more specifically, a currency area calibrated to the European Monetary Union) with labour market frictions in the form of labour turnover costs and workers’ heterogeneity to measure fiscal multipliers. We compute short and long run multipliers and open economy spillovers for five types of fiscal packages: pure demand stimuli and consumption tax cuts return very small multipliers; income tax cuts and hiring subsidies deliver larger multipliers, as they reduce distortions in sclerotic labour markets; short-time work (German "Kurzarbeit") returns negative short-run multipliers, but stabilises employment. Our model highlights a novel dimension through which multipliers operate, namely the labour demand stimulus which occurs in a model with non-walrasian labour markets.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4849.

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Length: 41 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:iza:izadps:dp4849
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  1. Galí, Jordi & López-Salido, David & Vallés, Javier, 2004. "Understanding the effects of government spending on consumption," Working Paper Series 0339, European Central Bank.
  2. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121.
  3. Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 706-727, April.
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  6. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," Working Paper Series 1090, European Central Bank.
  7. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary Persistence and the Labor Market: A New Perspective," CEPR Discussion Papers 7650, C.E.P.R. Discussion Papers.
  8. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
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  10. Mountford, A.W. & Uhlig, H.F.H.V.S., 2002. "What are the Effects of Fiscal Policy Shocks?," Discussion Paper 2002-31, Tilburg University, Center for Economic Research.
  11. Ester Faia & Wolfgang Lechthaler & Christian Merkl, 2009. "Labor Turnover Costs, Workers' Heterogeneity and Optimal Monetary Policy," Kiel Working Papers 1534, Kiel Institute for the World Economy.
  12. Cwik, Tobias J. & Wieland, Volker, 2009. "Keynesian government spending multipliers and spillovers in the Euro area," CFS Working Paper Series 2009/25, Center for Financial Studies (CFS).
  13. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
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  16. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  17. Yu-Fu Chen & Michael Funke, 2005. "Non-Wage Labour Costs, Policy Uncertainty and Labour Demand - a Theoretical Assessment," Quantitative Macroeconomics Working Papers 20511, Hamburg University, Department of Economics.
  18. 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.
  19. Ralf A. Wilke, 2005. "New Extimates of the Duration and Risk of Unemployment for West-Germany," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 125(2), pages 207-237.
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  23. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
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