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Fiscal Stimulus in a Business Cycle Model with Firm Entry

  • Roland Winkler

    (Goethe University Frankfurt)

  • Alexander Totzek

    (University Kiel)

This paper explores different fiscal stimuli within a business cycle model with an endogenous number of firms which we estimate for the U.S. economy using Bayesian techniques. We demonstrate that a changing number of firms is a crucial dimension for evaluating fiscal policy since it can both accelerate and decelerate the impacts of fiscal stimuli. When fiscal expansions cause the number 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 number of firms may decline. 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://economicdynamics.org/meetpapers/2011/paper_140.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 140.

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Date of creation: 2011
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Handle: RePEc:red:sed011:140
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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