Fiscal multipliers in a two-sector search and matching model

This paper evaluates the e¤ects of policy interventions on sectoral labour markets and the aggregate economy in a business cycle model with search and matching frictions. We extend the canonical model by including capital-skill complementarity in production, labour mar- kets with skilled and unskilled workers and on-the-job-learning (OJL) within and across skill types. We …rst …nd that, the model does a good job at matching the cyclical properties of sectoral employment and the wage-skill premium. We next …nd that vacancy subsidies for skilled and unskilled jobs lead to output multipliers which are greater than unity with OJL and less than unity without OJL. In contrast, the positive output e¤ects from cutting skilled and unskilled income taxes are close to zero. Finally, we …nd that the sectoral and aggre- gate e¤ects of vacancy subsidies do not depend on whether they are …nanced via public debt or distorting taxes