Shocks and the Unavoidable Road to Higher Taxes and Higher Unemployment

Wouter Denhaan ()

Review of Economic Dynamics, 2007, vol. 10, issue 3, pages 348-366

Abstract: This paper considers a matching model in which multiple steady-state unemployment rates exist if government expenditures and unemployment benefits are high enough. The focus on the extensive margin and a possible transition to a steady state with higher unemployment rates imply that the effect of tax rates can be high even when the elasticity between consumption and leisure is low. The matching friction limits transitions between steady states due to self-fulfilling expectations. After a sufficiently large increase in the unemployment rate and after a large enough increase in the tax burden caused by an exogenous increase in government spending, however, transition towards the high-unemployment steady state is unavoidable in an economy with generous unemployment benefits. (Copyright: Elsevier)

Keywords: Multiple equilibria; Matching friction; Unemployment benefits; Fiscal policy (search for similar items in EconPapers)
JEL-codes: C62 D50 E24 E62 J64 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://dx.doi.org/10.1016/j.red.2006.11.002
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:red:issued:06-7

Ordering information: This journal article can be ordered from
http://www.EconomicDynamics.org/RED17.htm

Access Statistics for this article

Review of Economic Dynamics is edited by Gianluca Violante

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics
Address: Review of Economic Dynamics Academic Press Editorial Office 525 "B" Street, Suite 1900 San Diego, CA 92101
Contact information at EDIRC.
Series data maintained by Christian Zimmermann ().