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Fiscal Calculus in a New Keynesian Model with Labor Market Frictions

Author

Listed:
  • 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))

Abstract

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.

Suggested Citation

  • Alessia Campolmi & Ester Faia & Roland Winkler, 2011. "Fiscal Calculus in a New Keynesian Model with Labor Market Frictions," MNB Working Papers 2011/5, Magyar Nemzeti Bank (Central Bank of Hungary).
  • Handle: RePEc:mnb:wpaper:2011/5
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    File URL: http://www.mnb.hu/letoltes/wp-2011-05.pdf
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    References listed on IDEAS

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    1. Campolmi, Alessia & Gnocchi, Stefano, 2016. "Labor market participation, unemployment and monetary policy," Journal of Monetary Economics, Elsevier, vol. 79(C), pages 17-29.
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    3. Mathias Trabandt & Harald Uhlig, 2006. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," SFB 649 Discussion Papers SFB649DP2006-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Davig, Troy & Leeper, Eric M., 2011. "Monetary-fiscal policy interactions and fiscal stimulus," European Economic Review, Elsevier, vol. 55(2), pages 211-227, February.
    5. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
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    9. 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.
    10. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2010. "New Keynesian versus old Keynesian government spending multipliers," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 281-295, March.
    11. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March.
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    Citations

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    Cited by:

    1. Snower, Dennis J. & Lechthaler, Wolfgang, 2013. "Worker Identity, Employment Fluctuations and Stabilization Policy," IZA Discussion Papers 7413, Institute for the Study of Labor (IZA).
    2. repec:eee:deveco:v:127:y:2017:i:c:p:25-41 is not listed on IDEAS
    3. Kohlbrecher, Britta & Merkl, Christian & Nordmeier, Daniela, 2016. "Revisiting the matching function," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 350-374.
    4. repec:fip:fedlps:y:2012:i:jan7 is not listed on IDEAS
    5. Cantore, Cristiano & Levine, Paul & Melina, Giovanni & Yang, Bo, 2012. "A fiscal stimulus with deep habits and optimal monetary policy," Economics Letters, Elsevier, vol. 117(1), pages 348-353.
    6. Kuo, Chun-Hung & Miyamoto, Hiroaki, 2015. "Fiscal stimuli in the form of job creation subsidies," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 267-284.
    7. Chun-Hung Kuo & Hiroaki Miyamoto, 2014. "Fiscal Stimulus and Unemployment Dynamics," Working Papers EMS_2014_05, Research Institute, International University of Japan.
    8. repec:fip:fedlps:y:2012:i:jan13 is not listed on IDEAS
    9. James B. Bullard, 2012. "Death of a theory," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 83-102.
    10. Andrea Tafuro, 2015. " The Effects of Fiscal Policy on Employment: an Analysis of the Aggregate Evidence," Working Papers 2015: 03, Department of Economics, University of Venice "Ca' Foscari".
    11. Campolmi Alessia & Faia Ester & Winkler Roland, 2011. "Fiscal Calculus and the Labor Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-27, December.
    12. Epstein, Brendan & Finkelstein Shapiro, Alan, 2017. "Employment and firm heterogeneity, capital allocation, and countercyclical labor market policies," Journal of Development Economics, Elsevier, vol. 127(C), pages 25-41.
    13. Ryuta Ray Kato & Hiroaki Miyamoto, 2015. "Effects of Fiscal Stimulus on the Labor Market," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 11(2), pages 277-302, March.

    More about this item

    Keywords

    fiscal calculus; taxation; matching frictions; bayesian estimation;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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