Labour Tax Reforms, Cross-Country Coordination and the Monetary Policy Stance in the Euro Area: A Structural Model-Based Approach

83 Pages Posted: 2 Feb 2018

See all articles by Pascal Jacquinot

Pascal Jacquinot

European Central Bank (ECB)

Matija Lozej

University of Primorska; Central Bank of Ireland

Massimiliano Pisani

Bank of Italy

Date Written: February 1, 2018

Abstract

We evaluate the effects of permanently reducing labour tax rates in the euro area (EA) by simulating a large-scale open economy dynamic general equilibrium model. The model features the EA as a monetary union, split in two regions (Home and the rest of the EA - REA), the US, and the rest of the world, region-specific labour markets with search and matching frictions, and public employment. Our results are as follows. First, a permanent reduction in labour tax rates in the Home region would have stimulating effects on domestic economic activity and employment. Second, reducing labour tax rates simultaneously in both Home and REA would have additional expansionary effects on the Home region. Third, in the short run the expansionary effects on the EA economy of a EA-wide tax reduction are enhanced if the EA monetary policy is accommodative.

Keywords: DSGE models, labour taxes, unemployment, monetary union, open-economy macroeconomics

JEL Classification: E24, E32, E52, E62, F45

Suggested Citation

Jacquinot, Pascal and Lozej, Matija and Pisani, Massimiliano, Labour Tax Reforms, Cross-Country Coordination and the Monetary Policy Stance in the Euro Area: A Structural Model-Based Approach (February 1, 2018). ECB Working Paper No. 2127. Available at SSRN: https://ssrn.com/abstract=3116774

Pascal Jacquinot (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matija Lozej

University of Primorska ( email )

Glagoljaska 8
Koper, SI-6000
Slovenia

Central Bank of Ireland ( email )

Dame Street
Dublin, 2
Ireland

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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