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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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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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  1. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304 - 345.
  2. Lewis, Vivien & Poilly, Céline, 2012. "Firm entry, markups and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 670-685.
  3. Lewis, Vivien, 2009. "Business Cycle Evidence On Firm Entry," Macroeconomic Dynamics, Cambridge University Press, vol. 13(05), pages 605-624, November.
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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.
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  13. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2009. "Government Investment and Fiscal Stimulus in the Short and Long Runs," NBER Working Papers 15153, National Bureau of Economic Research, Inc.
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  15. Ester Faia & Wolfgang Lechthaler & Christian Merkl, 2010. "Fiscal Multipliers and the Labour Market in the Open Economy," Kiel Working Papers 1592, Kiel Institute for the World Economy.
  16. 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.
  17. Ester Faia, 2009. "Oligopolistic Competition and Optimal Monetary Policy," Kiel Working Papers 1552, Kiel Institute for the World Economy.
  18. 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.
  19. Harald Uhlig, 2010. "Some Fiscal Calculus," American Economic Review, American Economic Association, vol. 100(2), pages 30-34, May.
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