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Fiscal Stimulus and the Extensive Margin

Roland Winkler () and Vivien Lewis ()

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: Using VAR analysis on US data, we show that unanticipated fiscal expansions boost private consumption and business formation. Models with an extensive investment margin, i.e. endogenous firm and product entry, have difficulties explaining these two phenomena simultaneously. Considering different variants of an endogenous-entry business cycle model, we show that crowding-in of both consumption and entry can be generated only under very specific assumptions. In a static model with full depreciation, labor supply has to be extremely elastic. In a dynamic model, the fiscal stimulus must be sufficiently persistent such that future profits are high enough to generate entry. However, consumption falls for conventional parameter values. Lowering the wealth effect through the introduction of rule-of-thumb consumers or GHH preferences does not help to bring the model closer to the data.

JEL-codes: E21 E32 E62 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-dge and nep-mac
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