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Fiscal Calculus in a New Keynesian Model with Matching Frictions

  • Alessia Campolmi
  • Ester Faia
  • Roland Winkler

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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File URL: https://www.ifw-members.ifw-kiel.de/publications/fiscal-calculus-in-a-new-keynesian-model-with-matching-frictions-2/kwp-1602.pdf
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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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  2. Olivier Jean Blanchard & Peter A. Diamond, 1989. "The Aggregate Matching Function," NBER Working Papers 3175, National Bureau of Economic Research, Inc.
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  11. 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.
  12. Thomas Lubik & Michael Krause, 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Economics Working Paper Archive 504, The Johns Hopkins University,Department of Economics.
  13. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
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