Sequential Bargaining in a New Keynesian Model with Frictional Unemployment and Staggered Wage Negotiation

Thomas

2011

SSRN Journal

Abstract:This paper develops a medium-scale dynamic, stochastic, general equilibrium (DSGE) model for fiscal policy simulations. Relative to existing models of this type, our model incorporates a two-country monetary union structure, which makes it well suited to simulate fiscal measures by relatively large countries in a currency area. We also provide a notable degree of disaggregation on the government expenditures side, by explicitly distinguishing between (productivity-enhancing) public investment, public purchases and the public sector wage bill. Finally, we consider a labor market characterized by search and matching frictions, which allows to analyze the response of equilibrium unemployment to fiscal measures.In order to illustrate some of its applications, and motivated by recent policy debate in the Euro Area, we calibrate the model to Spain and the rest of the area and simulate a number of fiscal consolidation scenarios. We find that, in terms of output and employment losses, fiscal consolidation is the least damaging when achieved by reducing the public sector wage bill, whereas it is most damaging when carried out by cutting public investment.Keywords: General Equilibrium, Fiscal Policy Simulations, Labor Market Search JEL codes: E24, E32, E62, H20, H50 Non-technical summaryThe recent crisis has obliged governments around the world to put in place ambitious fiscal stimulus plans and the ensuing fiscal consolidation (or "exit") strategies in order to assure fiscal stability. The latter issue is moving center stage in current public debates. In order to bring fiscal balances back on track, fiscal authorities mainly have the possibility of increasing taxes and/or cutting public spending.But which taxes should be increased? Which spending components should be cut?All across Europe, countries such as Germany, Greece, Portugal, Spain and others have put forward consolidation plans that include cuts in public employment, public wages and public investment as well as increases in VAT and labor income tax rates. Which consequences can we expect from these measures on, among others, the spillover effects of fiscal actions in one country to the other. Second, we provide a notable degree of disaggregation on the fiscal expenditures side. In particular, we explicitly distinguish between public investment and public consumption; the latter in turn is divided between public purchases and the public sector wage bill. Each of these components has a distinct effect on the rest of the economy.The model thus allows simulating specific measures that have been implemented recently in a number of European countries, such as cuts in public sector wages and/or employment, and reductions in public investment. Fiscal expenditures are completed with a number of transfers to the private sector, including unemployment benefits and lump-sum subsidies. On the fiscal revenues side, the model considers also a wide range of taxes, including taxes on consumption, labor income, returns on bond holdings and on physical capital, and socia...

Section: The Modelmentioning

confidence: 99%

FiMod - A DSGE Model for Fiscal Policy Simulations

Thomas

2011

SSRN Journal

“…Following Stähler and Thomas (2012), we assume that labor services are not hired directly from the households but from a sector of firms that produce homogeneous labor services in the manner of Boscá et al 2011, Christoffel at al. (2009) or de Walque et al (2009). In this subsection, we focus on the final and intermediate goods sectors as well as on the construction sector, postponing the description of the labor market until the next subsection.…”

Section: Productionmentioning

confidence: 99%

Who benefits from using property taxes to finance a labor tax wedge reduction?

Journal of Housing Economics

2019

We use a New Keynesian DSGE model with a rental housing market to evaluate how financing a labor tax wedge reduction through higher property taxation affects the real economy and welfare. We find that a labor tax wedge reduction generates favorable macroeconomic effects and improves international competitiveness, independent of the financing instrument used. Even though it negatively affects the housing market, property acquisition taxation outperforms all other instruments as the financing instrument in terms of welfare. This finding is the result of allowing households to decide whether to buy or to rent housing services and of the fact that, in this situation, they shift from purchasing to renting more housing services. Abandoning tax credit on mortgage interest payments effectively harms borrowers.

“…(2009) or de Walque et al (2009. In this subsection, we focus on the retail and intermediate goods sectors, postponing the description of the labor market to the next subsection.…”

Section: Productionmentioning

confidence: 99%

“…Following Christoffel et al (2009) or de Walque et al (2009, we assume that labor firms hire workers from the household sector in order to produce homogenous labor services, which they sell to intermediate goods producers at the perfectly competitive price x t . The production function of each labor firm is linear in the number of hours worked by its employee, which is fixed at the levelh.…”

Section: Intermediate Goodsmentioning

confidence: 99%

German labor market and fiscal reforms 1999–2008: Can they be blamed for intra-euro area imbalances?

Gadatsch¹,

Journal of Macroeconomics

Weigert

2016

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn this paper, we assess the impact of major German structural reforms from 1999 to 2008 on key macroeconomic variables within a two-country monetary union DSGE model. By many, these reforms, especially the Hartz reforms on the labor market, are considered to be the root of thereafter observed imbalances in the Euro Area. We find that, in terms of German GDP, consumption, investment and (un)employment, the reforms were a clear success albeit the impact on the German trade balance and the current account was only minor. Most importantly, the rest of the Euro Area benefited from positive spillover effects. Hence, our analysis suggests that the reforms cannot be held responsible for the currently observed macroeconomic imbalances within the Euro Area.