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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
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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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  1. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," FRB Atlanta CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  2. Cwik, Tobias & Wieland, Volker, 2010. "Keynesian government spending multipliers and spillovers in the euro area," Working Paper Series 1267, European Central Bank.
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  10. Bergin, Paul R. & Corsetti, Giancarlo, 2008. "The extensive margin and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1222-1237, October.
  11. 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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