D Cooke
Optimal Fiscal Policy in a Model of Firm Entry and Financial Frictions
Cooke, D; Damjanovic, T.
Abstract
This paper studies firm entry with nancial frictions. We motivate our analysis by documenting that a fall in rm entry and a widening of the interest rate spread occur when there is a rise in idiosyncratic uncertainty. We then develop a model of rm entry and nancial frictions - with uctuations in the volatility of rm-level demand shocks - consistent with this empirical evidence. Finally, we study dividend and labor-income taxation. Financial frictions weaken the incentive to support rm entry, and in a calibrated version of our model, accounting for the increase in volatility observed during the 2007-09 recession, optimal scal policy raises (lowers) dividend (labor)-income taxes by up to 7 (1:5) percentage points.
Journal Article Type | Article |
---|---|
Acceptance Date | May 5, 2019 |
Online Publication Date | May 10, 2019 |
Publication Date | Jan 31, 2020 |
Deposit Date | May 9, 2019 |
Publicly Available Date | Nov 10, 2020 |
Journal | Review of Economic Dynamics |
Print ISSN | 1094-2025 |
Publisher | Elsevier |
Peer Reviewed | Peer Reviewed |
Volume | 35 |
Pages | 74-96 |
DOI | https://doi.org/10.1016/j.red.2019.05.001 |
Public URL | https://durham-repository.worktribe.com/output/1296669 |
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Copyright Statement
© 2019 This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
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