Fiscal Multipliers and the Labour Market in the Open Economy

Ester Faia, Wolfgang Lechthaler and Christian Merkl

No 4849, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Several contributions have recently assessed the size of fiscal multipliers both in RBC models and New Keynesian models. None of the studies considers a model with frictional labour markets which is a crucial element, particularly at times in which much of the fiscal stimulus has been directed toward labour market measures. We use an open economy model (more specifically, a currency area calibrated to the European Monetary Union) with labour market frictions in the form of labour turnover costs and workers’ heterogeneity to measure fiscal multipliers. We compute short and long run multipliers and open economy spillovers for five types of fiscal packages: pure demand stimuli and consumption tax cuts return very small multipliers; income tax cuts and hiring subsidies deliver larger multipliers, as they reduce distortions in sclerotic labour markets; short-time work (German "Kurzarbeit") returns negative short-run multipliers, but stabilises employment. Our model highlights a novel dimension through which multipliers operate, namely the labour demand stimulus which occurs in a model with non-walrasian labour markets.

Keywords: fiscal packages; labour market frictions; fiscal multipliers (search for similar items in EconPapers)
JEL-codes: E62 H20 H30 J20 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2010-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published - revised version published as 'Fiscal Stimulus and the Labor Market Policies in Europe' in: Journal of Economic Dynamics and Control, 2013, 37 (3), 483–499

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Related works:
Working Paper: Fiscal Multipliers and the Labour Market in the Open Economy (2010)
Working Paper: Fiscal multipliers and the labour market in the open economy (2010)
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