A numerical approach to fiscal policy, unemployment, and growth in Europe
We calibrate an infinite-horizon model with endogenous growth and unemployment on actual data from the largest countries in the European Union. Two types of balanced-budget fiscal policy experiments are studied. First, the effects of separately changing the tax rates on capital, labor and subsidies, as well as the replacement rates, are analyzed, assuming offsetting changes in lump-sum transfers. Second, we rule out offsetting transfers and study how effective is the cut in labor taxes when financed either raising capital taxation or reducing unemployment subsidies. We find two main results: (i) with lump-sum transfers, reducing labor taxes and unemployment subsidies is beneficial to both employment and growth, while cutting capital taxes is less beneficial; (ii) without transfers, cutting labor taxes is more effective when financed by a (modest) cut in unemployment subsidies rather than by a (sizable) increase in capital taxes. Sensitivity analysis shows that our results are robust to changes in a vast range of parameter values.
|Date of creation:||31 May 2000|
|Date of revision:|
|Note:||Type of Document - Acrobat PDF; prepared on IBM PC; to print on A4; pages: 45; figures: included. Zip file containing separated pdf files for body, tables, and figures|
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