Does nominal wage stickiness affect fiscal multiplier in a two-agent new Keynesian model?

MPRA Paper from University Library of Munich, Germany

Abstract: This study examines the effect of nominal wage stickiness on the fiscal multiplier in a two-agent new Keynesian model. We find that under fully flexible nominal wages, an increased share of liquidity-constrained (LC) consumers amplifies the fiscal multiplier in the cases of money-financed (MF) and debt-financed (DF) regimes. In the case of sticky nominal wages, an increase in the share of LC consumers drastically decreases the MF fiscal multiplier. We also demonstrate that even in the presence of nominal wage stickiness and LC consumers, the fiscal multiplier under an MF regime outperforms that under a DF regime. Furthermore, this paper shows that under the fiscal stimulus via a tax cut, an increased share of LC consumers magnifies the fiscal multiplier in the cases of MF and DF regimes. Finally, the degree of nominal price stickiness and the size of government spending are crucial in assessing the effect of fiscal stimulus on output.

Keywords: Money-financed regime; Debt-financed regime; Nominal wage stickiness; Liquidity-constrained consumers; Two-agent new Keynesian model (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2023-05-08
New Economics Papers: this item is included in nep-des, nep-dge and nep-mac
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https://mpra.ub.uni-muenchen.de/117241/1/Ida-Okano-2023-fiscal.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/120936/8/MPRA_paper_120936.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:117241

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