Employment and growth in Europe and the US - The role of fiscal policy composition
We analyze the impact of the composition of fiscal policy on employment and long-run growth. Our theoretical model builds on Barro (JPE, 1990) which we extend by endogenizing the decision to work and by allowing three kinds of government expenditures and three kinds of taxes. The model explains what we basically observe in the data for European countries: relatively high employment and growth in the Nordic countries, but poor employment and low growth in the core countries of the euro area. Our model can also explain employment and growth in the US.
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