Employment volatility is larger for young and old workers than for the prime aged. At the same time, in countries with high tax rates, the share of total hours supplied by young/old workers is lower. These two observations imply a negative correlation between government size and business cycle volatility. This paper assesses in a heterogenous agent OLG model the quantitative importance of these two facts to account for the empirical relation between government size and macroeconomic stability.
Bibliographical noteAccepted for publication on the 14/12/2015
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- Automatic stabilizers
- Distortionary taxes