Nikolai Stähler

FiMod - a DSGE model for fiscal policy simulations

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 two important features. First, we consider a two-country monetary union structure, which makes it well suited to simulate fiscal measures by relatively large countries in a currency area. Second, we 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. In addition, 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.

Employment Protection and Temporary Work Agencies

Employers who use temporary agency staff in contrast to regular staff are not affected by employment protection regulations when terminating a job. Therefore, services provided by temporary work agencies may be seen as a substitute for regular employment. In this paper, we analyze the effects of employment protection on the size of the temporary work agency sector in a model of equilibrium unemployment. We find that higher firing costs may even reduce temporary work agency employment if agencies themselves are subject to employment protection, a consideration which distinguishes our results from those for fixed-term employment arrangements.

UNEMPLOYMENT INSURANCE AND THE BUSINESS CYCLE: SHOULD BENEFIT ENTITLEMENT DURATION REACT TO THE CYCLE?

The aim of this paper is to study the optimal duration of unemployment benefit entitlement across the business cycle. We analyze whether the entitlement duration should be prolonged in bad and shortened in good times. Because of consumption smoothing, such a countercyclical policy can be welfare-enhancing as long as it does not affect labor market adjustment too severely and/or as long as it can even help to reduce inefficiencies there. If, however, the labor market is already quite inflexible, procyclical behavior may be preferable. In a calibrated dynamic business cycle framework, we find that countercyclical benefit entitlement duration may be preferable in the United States but not in Europe.

Long Dark Shadows or Innovative Spirits? The Effects of (Smoothing) Business Cycles on Economic Growth: A Survey of the Literature

It is argued that fiscal policy can play a part in preventing a possible downward spiral or be instrumental in achieving a higher long‐term path of growth. Never before has this argument been advanced as frequently as in the current economic crisis. However, the economic literature – an overview of which is given here – does not provide an unambiguous answer, either theoretically or empirically, to the question of the relationship between (the smoothing of) cyclical fluctuations and long‐term growth. In this context, two main contrasting explanatory paradigms can be identified: Schumpeter’s concept of creative destruction and the learning by doing hypothesis. Even if it were possible to identify the relationship more clearly on this basis, it is important not to lose sight of the problems associated with the real‐time assessment of the current economic situation, time lags and political economic incentives even in difficult times.

Employment Protection: Its Effects on Different Skill Groups and on the Incentive to become Skilled

Summary Employment protection affects labour market outcomes and hence the incentive to acquire skills. Using a matching model with two education levels in which workers decide ex-ante on their skill formation, it is shown that employment protection can raise the fraction of skilled workers. This will be the case if workers obtain a sufficiently large fraction of the rent created by skill formation. Furthermore, it will be shown that high-skilled workers face shorter unemployment duration and lower dismissal probabilities.

Structural and Cyclical Effects of Tax Progression

In a real-business-cycle model with labor market frictions, we find that a more progressive tax schedule fosters long-run incentives for job creation. Tax progression generally tends to decrease the costs of business cycles because of lower wage and employment volatility. However, the volatility of public revenues stemming from labor income taxation also increases. If the government uses revenue measures to balance its budget, this increases consumption volatility of households with limited asset market participation. The opposite holds whenever public consumption is used to balance the budget. Overall, tax progression is welfare-enhancing for low to intermediate degrees of progressivity.

Union Power as a Reason for Europe Not to Introduce Experience Rating

Theoretical economic literature dealing with the financing of unemployment insurance finds that experience rating helps to solve the externality caused by individually efficient but socially inefficient dismissals and hence reduces unemployment. This is, however, found in models where workers and firms bargain over wages individually. Introducing unionized wage bargaining - which at least in continental Europe is a defining feature of the economy - may reverse the result. This paper provides an example showing that wage setting by a monopoly union can result in an increase in unemployment

Coordinated Structural Reforms: Insights from Fiscal and Labour Market Reforms in Germany

This chapter analyses fiscal and labour market reforms in Germany using an extended version of the medium-scale open economy DSGE model FiMod. The simulations suggest that the labour market reforms had a positive impact on GDP, consumption and employment. However, the reforms also increased consumption inequality and negatively affected liquidity-constrained households by reducing their steady-state consumption level. These unintended redistributional effects of the reform were mitigated by a change in the composition of the tax mix as shown by the simulations. If these tax changes are fiscally budget-neutral, no adverse effects from higher financing costs occur.

Thoughts on a Fiscal Union in EMU

Abstract Using an estimated large-scale New Keynesian model, we assess the consequences of introducing a fiscal union within EMU. We differentiate between three different scenarios: public revenue equalisation, tax harmonisation and a centralised fiscal authority. Our results indicate that no country would significantly benefit from introducing any form of fiscal union. Comparing long-term, that is, steady state, effects we have winners and losers depending on the scenario. Differences in terms of business cycle statistics as well as in terms of risk sharing of asymmetric shocks are minor. This also explains why welfare differences are small across the fiscal union scenarios. A counterfactual exercise indicates that with a fiscal union regime already installed at the start of EMU, key macroeconomic variables would have reacted very similarly while debt dynamics would have changed notably.

Macroeconomic effects of increased wage flexibility in EMU

We analyse the macroeconomic effects of a more flexible wage setting process in the euro area. Reducing wage rigidities leads to far greater volatility in nominal wages, which ultimately translates into somewhat higher output and consumption volatility, while employment volatility is hardly affected. Even though volatility increases, the persistence of shocks is significantly reduced, which improves welfare of the union as a whole. We can show in a counterfactual analysis that, with lower wage rigidities, real GDP in the rest of the euro area would be higher and the unemployment rate lower compared to recent levels.