Kiel Working Papers, Kiel Institute for World Economics
No 1602:
Fiscal Calculus in a New Keynesian Model with Matching Frictions
Alessia Campolmi, Ester Faia and Roland Winkler
Abstract: The endorsement of expansionary fiscal packages has often
been based on the idea that large multipliers can contrast rising
unemployment. Is that really the case? We explore those issues in a New
Keynesian model in which unemployment arises because of matching frictions.
We compare fiscal packages with different targets (pure demand stimuli
versus subsidy to cost of hiring) and of government funding (lump sum
taxation versus distortionary taxation). We find that in presence of demand
stimuli fiscal multipliers are zero and even turn negative when financed
with distortionary taxation. On the other side, in a model with a
non-Walrasian labor market, policies aimed at reducing labor wedges, such
as cost of hiring, are particularly effective in boosting employment and
output
Keywords: fiscal calculus, taxation, matching frictions; (follow links to similar papers)
JEL-Codes: E62,; E63,; E24; (follow links to similar papers)
36 pages, March 2010
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