The government wage bill and private activity, with E. Pappa and E.Vella, Journal of Economic Dynamics and Control
We estimate the macroeconomic effects of public wage expenditures in U.S. data by identifying shocks to public employment and public wages using sign restrictions. Aggregate public wage bill shocks induce typically insignificant effects. Disaggregating by government level reveals that public employment shocks are mildly expansionary at the federal level and strongly expansionary at the state and local level by crowding in private consumption and increasing labor force participation and private-sector employment. Similarly, state and local government wage shocks lead to increases in consumption and output, while shocks to federal government wages induce significant contractionary effects. In a stylized DSGE model we show that the degree of complementarity between public and private goods in the consumption bundle is key for explaining the observed heterogeneity.
Investment tax incentives and their big time-to-build fiscal multiplier, with Y. Deli and S.Kalyvitis.
This paper studies how investment tax incentives stimulate output in a medium-scale DSGE model, which allows for a variety of fiscal financing mechanisms. We find that the horizon following a positive shock in investment tax incentives is crucial. The shock is highly expansionary in the long run, with the relevant fiscal multiplier substantially exceeding 1, but this effect only becomes visible after two to three years. Our analysis indicates that a rise in the marginal product of labor and the demand for labor trigger this expansion, which is an effect that partial equilibrium studies ignore. The results suggest that investment tax incentives are even more effective when nominal wages adjust faster.
Non-linear effects of fiscal policy: the role of credit.
The impact of fiscal policy spill-overs inside and outside the euro area, with G. Koester and P. Mohl.