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Fiscal Multipliers and the Labour Market in the Open Economy

Author

Listed:
  • Faia, Ester

    (Goethe University Frankfurt)

  • Lechthaler, Wolfgang

    (Kiel Institute for the World Economy)

  • Merkl, Christian

    (University of Erlangen-Nuremberg)

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.

Suggested Citation

  • Faia, Ester & Lechthaler, Wolfgang & Merkl, Christian, 2010. "Fiscal Multipliers and the Labour Market in the Open Economy," IZA Discussion Papers 4849, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp4849
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    References listed on IDEAS

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    Cited by:

    1. Jooste, Charl & Liu, Guangling (Dave) & Naraidoo, Ruthira, 2013. "Analysing the effects of fiscal policy shocks in the South African economy," Economic Modelling, Elsevier, vol. 32(C), pages 215-224.
    2. Javier Andrés & José E. Boscá & Javier Ferri, 2016. "Instruments, rules, and household debt: the effects of fiscal policy," Oxford Economic Papers, Oxford University Press, vol. 68(2), pages 419-443.
    3. Campolmi, Alessia & Faia, Ester & Winkler, Roland C., 2010. "Fiscal calculus in a New Keynesian model with matching frictions," Kiel Working Papers 1602, Kiel Institute for the World Economy (IfW Kiel).
    4. Roland Winkler & Alexander Totzek, 2011. "Fiscal Stimulus in a Business Cycle Model with Firm Entry," 2011 Meeting Papers 140, Society for Economic Dynamics.
    5. Özge Dilaver & Robert Calvert Jump & Paul Levine, 2018. "Agent‐Based Macroeconomics And Dynamic Stochastic General Equilibrium Models: Where Do We Go From Here?," Journal of Economic Surveys, Wiley Blackwell, vol. 32(4), pages 1134-1159, September.
    6. Dieter Hundt & Frank-Jürgen Weise & Hagen Lesch & Wolfgang Lechthaler & Christian Merkl, 2012. "Eurokrise, Energiewende, Konjunkturabkühlung: Ende des deutschen Jobwunders?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 65(01), pages 03-13, January.
    7. Mai Chi Dao, 2013. "International spillovers of labour market policies," Oxford Economic Papers, Oxford University Press, vol. 65(2), pages 417-446, April.
    8. Markus Brückner & Evi Pappa, 2012. "Fiscal Expansions, Unemployment, And Labor Force Participation: Theory And Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1205-1228, November.
    9. Ekkehard Ernst & Uma Rani, 2011. "Understanding unemployment flows," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 27(2), pages 268-294.
    10. Alessia Campolmi & Ester Faia & Roland Winkler, 2011. "Fiscal Calculus in a New Keynesian Model with Labor Market Frictions," MNB Working Papers 2011/5, Magyar Nemzeti Bank (Central Bank of Hungary).
    11. Cristiano Cantore & Paul Levine & Giovanni Melina, 2014. "A Fiscal Stimulus and Jobless Recovery," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(3), pages 669-701, July.
    12. Cantore, Cristiano & Levine, Paul & Melina, Giovanni & Yang, Bo, 2012. "A fiscal stimulus with deep habits and optimal monetary policy," Economics Letters, Elsevier, vol. 117(1), pages 348-353.
    13. Totzek, Alexander & Winkler, Roland C., 2010. "Fiscal stimulus in model with endogenous firm entry," MPRA Paper 26829, University Library of Munich, Germany, revised Nov 2010.
    14. Christian Merkl & Enzo Weber, 2020. "Raus aus der Neueinstellungskrise! [End the Recruitment Crisis!]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 100(7), pages 507-509, July.

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    More about this item

    Keywords

    fiscal packages; labour market frictions; fiscal multipliers;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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