Titelaufnahme

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 nd 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 in ationary pressures. At the zero lower bound, higher in ation expectations reduce the real interest rate, further stimulating consumption and hence amplifying the hiring stimulus.