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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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Paper provided by Magyar Nemzeti Bank (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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