Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/237317 
Year of Publication: 
2021
Series/Report no.: 
ECONtribute Discussion Paper No. 072
Publisher: 
University of Bonn and University of Cologne, Reinhard Selten Institute (RSI), Bonn and Cologne
Abstract: 
This paper assesses the ability of hiring subsidies to stimulate employment. I build a New Keynesian model with equilibrium unemployment and incomplete markets. Quantitatively, I find that an increase in hiring subsidies reduces unemployment more at the zero lower bound than it does during normal times. Central to this result is a precautionary savings channel. By stimulating labor demand, hiring subsidies reduce unemployment risk and precautionary savings. This increases the demand for consumption goods and generates inflationary pressures. At the zero lower bound, higher inflation expectations reduce the real interest rate, further stimulating consumption and hence amplifying the hiring stimulus.
Subjects: 
Unemployment risk
precautionary savings
hiring subsidies
zero lower bound
JEL: 
E62
E21
E52
Document Type: 
Working Paper

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