Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/231377 
Year of Publication: 
2021
Series/Report no.: 
IMFS Working Paper Series No. 152
Publisher: 
Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS), Frankfurt a. M.
Abstract: 
This paper examines the effectiveness of labor cost reductions as a means to stimulate economic activity and assesses the differences which may occur with the prevailing exchange rate regime. We develop a medium-scale three-region DSGE model and show that the impact of a cut in employers' social security contributions rate does not vary significantly under different exchange rate regimes. We find that both the interest rate and the exchange rate channel matters. Furthermore, the measure appears to be effective even if it comes along with a consumption tax increase to preserve long-term fiscal sustainability. Finally, we assess whether obtained theoretical results hold up empirically by applying the local projection method. Regression results suggest that changes in employers' social security contributions rates have statistically significant real effects - a one percentage point reduction leads to an average cumulative rise in output of around 1.3 percent in the medium term. Moreover, the outcome does not differ significantly across the different exchange rate regimes.
Subjects: 
Structural policies
Labor cost adjustments
Exchange rate regime
Local projection
DSGE
JEL: 
C53
C54
E32
E37
E61
E62
F41
F45
F47
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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