Kiel Working Papers, Kiel Institute for World Economics
No 1592:
Fiscal Multipliers and the Labour Market in the Open Economy
Ester Faia, Wolfgang Lechthaler and Christian Merkl
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 on the EMU) 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 cut 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 multipliers, fiscal packages, labour market frictions; (follow links to similar papers)
JEL-Codes: E62,; H30,; J20,; H20; (follow links to similar papers)
37 pages, February 2010
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