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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. 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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  13. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 299-353 National Bureau of Economic Research, Inc.
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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.
  18. 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.
  19. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
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