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Fiscal stimulus in model with endogenous firm entry

  • Totzek, Alexander
  • Winkler, Roland C.

This paper explores different fiscal stimuli within a business cycle model with an endogenous mass of firms which we estimate for the U.S. economy using Bayesian techniques. We demonstrate that a changing mass of firms is a crucial dimension for evaluating fiscal policy since it can both accelerate and decelerate the impacts of fiscal stimuli. When fiscal interventions cause the mass of firms to decline, an additional crowding-out effect of investment in new firms results in a multiplier below that of the standard RBC model. In the presence of demand stimuli, fiscal multipliers are small and the mass of firms may decline. This holds in particular under distortionary tax financing. By contrast, policies that disburden private agents from income taxes are effective in boosting economic activity and product creation.

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File URL: http://mpra.ub.uni-muenchen.de/26829/1/MPRA_paper_26829.pdf
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File URL: http://mpra.ub.uni-muenchen.de/27115/1/MPRA_paper_27115.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26829.

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Date of creation: 07 Apr 2010
Date of revision: Nov 2010
Handle: RePEc:pra:mprapa:26829
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  7. Shu-Chun S. Yang & Todd B. Walker & Eric M. Leeper, 2010. "Government Investment and Fiscal Stimulus," IMF Working Papers 10/229, International Monetary Fund.
  8. Alessia Campolmi & Ester Faia & Roland Winkler, 2010. "Fiscal Calculus in a New Keynesian Model with Matching Frictions," Kiel Working Papers 1602, Kiel Institute for the World Economy.
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  17. Paul R. Masson, 2008. "Monetary Policy," Chapters, in: International Handbook of Development Economics, Volumes 1 & 2, chapter 54 Edward Elgar.
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  19. Devereux, Michael B. & Head, Allen C. & Lapham, Beverly J., 1996. "Aggregate fluctuations with increasing returns to specialization and scale," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 627-656, April.
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  21. Pedro Gomes, 2011. "Fiscal policy and the labour market: the effects of public sector employment and wages," European Economy - Economic Papers 439, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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  24. Totzek, Alexander, 2009. "Firms' heterogeneity, endogenous entry, and exit decisions," Economics Working Papers 2009,11, Christian-Albrechts-University of Kiel, Department of Economics.
  25. 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.
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