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Optimal Fiscal Policy in a Model of Firm Entry and Financial Frictions

Cooke, D; Damjanovic, T.

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Authors

D Cooke



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.

Citation

Cooke, D., & Damjanovic, T. (2020). Optimal Fiscal Policy in a Model of Firm Entry and Financial Frictions. Review of Economic Dynamics, 35, 74-96. https://doi.org/10.1016/j.red.2019.05.001

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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