Hiring Stimulus and Precautionary Savings in a Liquidity Trap

Rubén Domínguez Díaz ()
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Rubén Domínguez Díaz: University of Bonn, Institute for Macroeconomics and Econometrics
Authors registered in the RePEc Author Service: Ruben Dominguez-Diaz

No 72, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: This paper assesses the ability of hiring subsidies to stimulate employment. I build a New Keynesian model with equilibrium unemployment and incomplete markets. Quantitatively, I find that an increase in hiring subsidies reduces unemployment more at the zero lower bound than it does during normal times. Central to this result is a precautionary savings channel. By stimulating labor demand, hiring subsidies reduce unemployment risk and precautionary savings. This increases the demand for consumption goods and generates inflationary pressures. At the zero lower bound, higher inflation expectations reduce the real interest rate, further stimulating consumption and hence amplifying the hiring stimulus.

Keywords: Unemployment risk; precautionary savings; hiring subsidies; zero lower bound (search for similar items in EconPapers)
JEL-codes: E21 E52 E62 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2021-03
New Economics Papers: this item is included in nep-dge and nep-mac
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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_072_2021.pdf First version, 2021 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:072

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