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A numerical approach to fiscal policy, unemployment, and growth in Europe

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  • Francesco Daveri

    (University of Parma)

  • Marco Maffezzoli

    (Bocconi University)

Abstract

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.

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  • Francesco Daveri & Marco Maffezzoli, 2000. "A numerical approach to fiscal policy, unemployment, and growth in Europe," Macroeconomics 0004010, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0004010 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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    References listed on IDEAS

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    Cited by:

    1. Xavier Raurich & Hector Sala & Valeri Sorolla, "undated". "Employment and public capital in Spain," Working Papers 2001-21, FEDEA.
    2. Ardagna, Silvia, 2007. "Fiscal policy in unionized labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1498-1534, May.
    3. Francesco Zanetti, 2003. "Non-Walrasian Labor Market and the European Business Cycle," Boston College Working Papers in Economics 574, Boston College Department of Economics, revised 20 May 2004.
    4. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, pages 644-658.
    5. John Kennan, 2001. "Uniqueness of Positive Fixed Points for Increasing Concave Functions on Rn: An Elementary Result," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 893-899, October.
    6. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James, 2011. "The distributional consequences of tax reforms under market distortions," SIRE Discussion Papers 2011-73, Scottish Institute for Research in Economics (SIRE).
    7. Xavier Raurich & Valeri Sorolla, 2012. "Growth, Unemployment and Wage Inertia," DEGIT Conference Papers c017_029, DEGIT, Dynamics, Economic Growth, and International Trade.
    8. Raurich, Xavier & Sorolla, Valeri, 2014. "Growth, unemployment and wage inertia," Journal of Macroeconomics, Elsevier, pages 42-59.
    9. Marco Maffezzoli, 2001. "Non-Walrasian Labor Markets and Real Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 860-892, October.
    10. Ardagna, Silvia, 2007. "Fiscal Policy in Unionized Labor Markets," Scholarly Articles 2580048, Harvard University Department of Economics.
    11. Margit Schratzenstaller, 2007. "WIFO White Paper: Public Sector Contribution to Growth," WIFO Monatsberichte (monthly reports), WIFO, vol. 80(6), pages 509-526, June.
    12. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James R., 2013. "Tax reforms under market distortions in product and labour markets," European Economic Review, Elsevier, vol. 61(C), pages 28-42.
    13. George Hondroyiannis, 2010. "Fertility Determinants and Economic Uncertainty: An Assessment Using European Panel Data," Journal of Family and Economic Issues, Springer, vol. 31(1), pages 33-50, March.
    14. José Ramón García & Valeri Sorolla, 2014. "Monopolistic Competition and Different Wage Setting Systems," Scottish Journal of Political Economy, Scottish Economic Society, pages 48-77.
    15. Xavier Raurich & Hector Sala & Valeri Sorolla, "undated". "Employment and public capital in Spain," Working Papers 2001-21, FEDEA.
    16. Xavier Raurich & Valeri Sorolla, 2008. "A General Framework for Growth Models with Non-Competitive Labor and Product Markets and Disequilibrium Unemployment," Working Papers 369, Barcelona Graduate School of Economics.

    More about this item

    Keywords

    Fiscal Policy; Taxation; Europe; Unemployment; Growth; Numerical Simulation; Trade Union;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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