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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: https://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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  19. Totzek, Alexander, 2009. "Firms' heterogeneity, endogenous entry, and exit decisions," Economics Working Papers 2009,11, Christian-Albrechts-University of Kiel, Department of Economics.
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  24. Campolmi, Alessia & Faia, Ester & Winkler, Roland C., 2010. "Fiscal calculus in a New Keynesian model with matching frictions," Kiel Working Papers 1602, Kiel Institute for the World Economy (IfW).
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