The Role of Labor Markets for Euro Area Monetary Policy

Christoffel, Kai; Kuester, Keith; Linzert, Tobias

doi:10.2139/ssrn.1337778

Cited by 36 publications

(48 citation statements)

References 59 publications

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“…We set φ = 0 (no progression) in the benchmark and then analyze how the model reacts when increasing φ while leaving the other parameters described in this section unchanged. The calibration is much in line with Christoffel et al (2009) and Moyen and Stähler (forthcoming). The parameter values are summarized in Table 1.…”

Section: Benchmark Calibrationsupporting

confidence: 83%

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Structural and Cyclical Effects of Tax Progression

Kremer¹,

Stähler²

2016

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Tax progression is a major attribute of current tax systems and a major element of redistribution policy. Theoretically, there is no clear answer to the question of how progressive taxes should be. In practice, approaches have differed both over time and from country to country. While top rates of income taxes have declined since the 1980s and the number of tax brackets has decreased in many countries, the overall progressivity of public tax and transfer systems has not necessarily been on a downward trend. Furthermore, top rates have been raised again as part of a number of recent consolidation packages, which has been seen as a new tendency towards higher tax progression. Besides implications for structural unemployment and income distribution, the dynamic properties of tax progression is attracting renewed interest. Given stronger calls for countercyclical fiscal policy and the shortcomings of ad hoc fiscal interventions in practice, it might be asked what role tax progression can play in the game of "timely, targeted and temporary" automatic stabilization.In this paper, we discuss distributional aspects of tax progression only very briefly and in a highly stylized manner. Instead, we focus on two other issues: the structural and cyclical consequences of a progressive tax system when labor markets are imperfect. In such economies, tax progression may curb workers' wage claims and, thus, decrease structural unemployment. Furthermore, changes in average tax rates over the business cycle induced by tax progression may dampen net income fluctuations. By combining these two issues in a real business cycle model with labor market frictions and creditconstrained consumers, we are able to assess, in particular, the relative importance of the structural and cyclical impact of tax progression on welfare.We find that a more progressive tax schedule reduces structural unemployment as it decreases wages and, thus, fosters long-run incentives for job creation. However, since the costs of filling a vacancy increase when unemployment falls, there exists an optimal level of unemployment ("Hosios condition"). Therefore, tax progression improves steady-state welfare up to a certain threshold and harms it beyond that. We also show that tax progression always increases the costs of business cycles for consumers who can shift consumption intertemporally through saving and borrowing (optimizers), while it always reduces the business cycle costs for credit constrained households (rule-of-thumb consumers). The latter is due to less volatile net wages, while the former follows from progressivity-induced tax rate volatility and an income effect resulting from employment stabilization. Our analysis suggests that the business cycle effect dominates the steadystate effect. Overall, tax progression seems welfare-enhancing up to a certain threshold and always shifts relative utility from optimizers to rule-of-thumb consumers. Nicht-technische Zusammenfassung AbstractIn a real business cycle model with labor market frictions, we find that a...

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Section: Benchmark Calibrationsupporting

confidence: 83%

“…For the productivity shock, we assume high autocorrelation, ρ z = 0.807 and a standard deviation of 0.475. This targets the measured standard deviation of output in the euro area,ŷ t ≈ log(y t /ȳ) = 0.86 (see Christoffel et al, 2009). …”

Section: Benchmark Calibrationmentioning

confidence: 99%

Structural and Cyclical Effects of Tax Progression

Kremer¹,

Stähler²

2016

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“…The retail and intermediate goods sectors of the economy are similar to Wouters (2003, 2007) or Christiano et al (2005), with the exception that labor services are not hired directly from the households but from a sector of firms that produce homogenous labor services in the manner of Christoffel at al. (2009) or de Walque et al (2009.…”

Section: Productionmentioning

confidence: 99%

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

Gadatsch¹,

Stähler

Weigert

2016

Journal of Macroeconomics

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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.

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“…Given a price P it for each variety i, …nal good …rms choose optimally the inputs Y it to minimize total expenditure R 1 0 P it Y it di subject to the CES aggregator function (9). This yields the following demand functions,…”

Section: Final Goods Firmsmentioning

confidence: 99%

“…A high relative disutility cost of hours, (1 + h ) =', or a high worker bargaining power, , shift the real marginal wage curve up for any given number of hours worked, see Figure 1. The farther the real marginal wage is from the marginal rate of substitution, the greater is the required consumption subsidy, which shifts the marginal rate of substution down, see (9).…”

mentioning

confidence: 99%

Employment, Hours and Optimal Monetary Policy

2014

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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. www.econstor.eu Terms of use: Documents in WO R K I N G PA P E R S E R I E S N O 1713 / AU G U S T 2014 EMPLOYMENT, HOURS AND OPTIMAL MONETARY POLICY Maarten Dossche, Vivien Lewis and Céline PoillyIn 2014 all ECB publications feature a motif taken from the €20 banknote.NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily refl ect those of the ECB.

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The Role of Labor Markets for Euro Area Monetary Policy

Abstract: 4Non-technical summary 5

Cited by 36 publications

References 59 publications

Structural and Cyclical Effects of Tax Progression

Structural and Cyclical Effects of Tax Progression

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

Employment, Hours and Optimal Monetary Policy

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