Firing Costs and Business Cycle Fluctuations

39 Pages Posted: 18 Feb 2008

See all articles by Marcelo Veracierto

Marcelo Veracierto

Federal Reserve Bank of Chicago - Research Department

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This article considers a real business cycle model with establishment level dynamics and uses it to analyze the effects of firing taxes. It finds that firing taxes can have significant consequences on business cycle fluctuations, that the largest effects are on aggregate employment, and that even relatively small firing taxes have substantial effects. A significant contribution of the article is computational: It describes how to use standard linear-quadratic methods to solve for a stochastic equilibrium of an economy with tax distortions.

Suggested Citation

Veracierto, Marcelo, Firing Costs and Business Cycle Fluctuations. International Economic Review, Vol. 49, Issue 1, pp. 1-39, February 2008, Available at SSRN: or

Marcelo Veracierto (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

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