Publication

We use an open economy model with labor market frictions in the form of labor 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 labor markets; short-time work (German "Kurzarbeit") returns negative short-run multipliers, but stabilizes employment. Our model highlights a novel dimension through which multipliers operate, namely the labor demand stimulus which occurs in a model with non-Walrasian labor markets.