Abstract
This chapter analyses fiscal and labour market reforms in Germany using an extended version of the medium-scale open economy DSGE model FiMod. The simulations suggest that the labour market reforms had a positive impact on GDP, consumption and employment. However, the reforms also increased consumption inequality and negatively affected liquidity-constrained households by reducing their steady-state consumption level. These unintended redistributional effects of the reform were mitigated by a change in the composition of the tax mix as shown by the simulations. If these tax changes are fiscally budget-neutral, no adverse effects from higher financing costs occur.
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