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Efficiency wages, financial market integration, and the fiscal multiplier

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  • Alper Çenesiz, M.
  • Pierdzioch, Christian

Abstract

We used a "new-open economy macroeconomic" model featuring a labor-market friction in the form of efficiency wages to analyze the implications of financial market integration for the fiscal multiplier. The fiscal multiplier measures the accumulated effect of fiscal policy on output. Conventional wisdom based on the basic textbook version of the classic Mundell-Fleming model suggests that the fiscal multiplier should become smaller as financial markets become more integrated. We show that a labor-market friction in the form of efficiency wages implies that financial market integration should increase the fiscal multiplier.

Suggested Citation

  • Alper Çenesiz, M. & Pierdzioch, Christian, 2009. "Efficiency wages, financial market integration, and the fiscal multiplier," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 853-867, September.
    • Handle: RePEc:eee:jimfin:v:28:y:2009:i:5:p:853-867
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