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FIRING COSTS AND BUSINESS CYCLE FLUCTUATIONS*

Authors

  • Marcelo Veracierto

    1. Federal Reserve Bank of Chicago, U.S.A.
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    • 1

      The views expressed here do not necessarily reflect the position of the Federal Reserve Bank of Chicago or the Federal Reserve System. I have benefited from the comments of seminar participants at CERGE-EI, Federal Reserve Bank of Chicago, Humboldt University, University of Chicago, University of Pennsylvania, University of Texas (Austin), University of Toronto, University of Tokyo, University of Western Ontario, York University, the 2004 SED meetings, and the 2004 NBER Summer Institute. Please address correspondence to M. Veracierto, Federal Reserve Bank of Chicago, Research Department, 230 South LaSalle Street, Chicago, IL 60604, U.S.A. Phone: 312-322-5695. E-mail: mveracierto@frbchi.org.


  • *

    Manuscript received April 2005; revised December 2006.

Abstract

This article considers a real business cycle model with establishment level dynamics and uses it to analyze the effects of firing taxes. It finds that firing taxes can have significant consequences on business cycle fluctuations, that the largest effects are on aggregate employment, and that even relatively small firing taxes have substantial effects. A significant contribution of the article is computational: It describes how to use standard linear-quadratic methods to solve for a stochastic equilibrium of an (S,s) economy with tax distortions.

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