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

Francesco Daveri () and Marco Maffezzoli ()

Macroeconomics from EconWPA

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.

Keywords: Fiscal Policy; Taxation; Europe; Unemployment; Growth; Numerical Simulation; Trade Union (search for similar items in EconPapers)
JEL-codes: E13 E24 E62 J51 O41 (search for similar items in EconPapers)
Date: Written
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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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0004010

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