Tax Reform and Labour-Market Performance in the Euro Area: A Simulation-Based Analysis Using the New Area-Wide Model

73 Pages Posted: 25 Apr 2007

See all articles by Günter Coenen

Günter Coenen

European Central Bank (ECB)

Peter McAdam

European Central Bank (ECB)

Roland Straub

European Central Bank (ECB)

Date Written: April 2007

Abstract

In this paper, we employ a calibrated two-country version of the New Area-wide Model (NAWM) currently under development at the European Central Bank to examine the potential benefits and spillovers of reducing labour-market distortions caused by euro area tax structures. Our analysis shows that lowering tax distortions to levels prevailing in the United States would result in an increase in hours worked and output by more than 10 percent. At the same time, tax reductions would have positive spillovers to the euro area's trade partners, bolstering the case for tax reforms from a global perspective. Finally, we illustrate that, in the presence of heterogeneous households, distributional effects may be of importance when gauging the impact of tax reforms.

Keywords: DSGE modelling, limited asset-market participation, fiscal policy, tax

JEL Classification: E32, E62

Suggested Citation

Coenen, Günter and McAdam, Peter and Straub, Roland, Tax Reform and Labour-Market Performance in the Euro Area: A Simulation-Based Analysis Using the New Area-Wide Model (April 2007). ECB Working Paper No. 747, Available at SSRN: https://ssrn.com/abstract=978375 or http://dx.doi.org/10.2139/ssrn.978375

Günter Coenen (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7887 (Phone)
+49 69 1344 6575 (Fax)

Peter McAdam

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Eurotower
D-60311 Frankfurt am Main
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Roland Straub

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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