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Fiscal Calculus in a New Keynesian Model with Labor Market Frictions

  • Alessia Campolmi

    ()

    (Central European University; Magyar Nemzeti Bank (central bank of Hungary))

  • Ester Faia

    ()

    (Goethe University Frankfurt; Kiel Institute for the World Economy (IfW); CEPREMAP)

  • Roland Winkler

    ()

    (Goethe University Frankfurt; Kiel Institute for the World Economy (IfW))

During the Great Recession following the recent financial crisis large fiscal stimuli were implemented to counteract labor market sclerosis. We explore the effectiveness of various fiscal packages in a matching model featuring inefficient unemployment and a rich fiscal sector employing distortionary taxation and government debt. Results show that only stimuli directed toward the labor market, such as hiring subsidies, deliver large multipliers. Those policies can, indeed, abate the congestion externality, pervasive in the labor market. Various robustness checks confirm the results. The results obtained in the calibrated model are also confirmed through Bayesian estimation.

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File URL: http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Kiadvanyok/mnben_mnbfuzetek/WP_2011_05.pdf
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Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2011/5.

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Length: 42 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:mnb:wpaper:2011/5
Contact details of provider: Web page: http://www.mnb.hu/

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  1. Mathias Trabandt & Harald Uhlig, 2009. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," NBER Working Papers 15343, National Bureau of Economic Research, Inc.
  2. Troy Davig & Eric M. Leeper & Todd B. Walker, 2010. ""Unfunded liabilities" and uncertain fiscal financing," Research Working Paper RWP 10-09, Federal Reserve Bank of Kansas City.
  3. Leeper, Eric M. & Walker, Todd B. & Yang, Shu-Chun S., 2010. "Government investment and fiscal stimulus," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1000-1012, November.
  4. Cogan, John F. & Cwik, Tobias J. & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," CFS Working Paper Series 2009/17, Center for Financial Studies (CFS).
  5. 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.
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  8. Eric Leeper & Todd B. Walker & Susan Shu-Chun Yang, 2009. "Government Investment And Fiscal Stimulus In The Short And Long Runs," Caepr Working Papers 2009-011, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  9. Yuan, M. & Li, W., 1999. "Dynamic Employment and Hours Effects of Government Spending Shocks," Working Papers 99-1, Bank of Canada.
  10. Davig, Troy & Leeper, Eric M., 2009. "Monetary-Fiscal Policy Interactions and Fiscal Stimulus," CEPR Discussion Papers 7509, C.E.P.R. Discussion Papers.
  11. Ester Faia & Wolfgang Lechthaler & Christian Merkl, 2010. "Fiscal Multipliers and the Labour Market in the Open Economy," Kiel Working Papers 1592, Kiel Institute for the World Economy.
  12. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
  13. 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.
  14. Alessia Campolmi & Stefano Gnocchi, 2014. "Labor Market Participation, Unemployment and Monetary Policy," Working Papers 14-9, Bank of Canada.
  15. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
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