| Abstract: | Abstract. In this paper we examine the effectiveness of a fiscal policy based on government subsidies to firms in an open economy, characterized by the “strategic” interaction of government and unions. Before developing the theoretical model, some evidence about government reaction functions for selected OECD countries is presented. The main theoretical results can be summed up as follows. A fiscal policy based on a tax-financed increase in government transfers to firms makes the country more competitive internationally, but reduces employment. Only when the increase in government transfers to firms is financed by the public debt is the fiscal policy able to achieve its two-fold aim of greater competitiveness and a higher level of employment. |
