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Fiscal shocks and real rigidities

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Author Info
Francesco Furlanetto (Norges Bank (Central Bank of Norway))
Martin Seneca () (University of Aarhus)

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Abstract

In this paper we show that empirically plausible results on the effects of fiscal shocks in Galí, López-Salido and Vallés (2007) rely on a high degree of price stickiness and a large percentage of financially constrained agents. Real rigidities in the form of habit persistence, fixed firm-specific capital and Kimball demand curves interact in interesting ways with nominal and finan- cial rigidities and allow us to reproduce the same consumption multiplier as Galí et al. (2007) under only two and a half quarters of price stickiness, in- stead of four, and only 30 per cent of constrained agents instead of 50 per cent. Therefore, real rigidities are useful in the study of fiscal shocks in addi- tion to monetary and productivity shocks as has been shown in the previous literature.

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Publisher Info
Paper provided by Norges Bank in its series Working Paper with number 2008/10.

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Length: 41 pages
Date of creation: 23 Jun 2008
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Handle: RePEc:bno:worpap:2008_10

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Related research
Keywords: Rule-of-thumb consumers; habit persistence; Kimball demand curves;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  1. Francesco Furlanetto & Martin Seneca, 2007. "Rule-of-thumb consumers, productivity and hours," Working Paper 2007/05, Norges Bank. [Downloadable!]
  2. Francesco FURLANETTO, 2007. "Fiscal Shocks and the Consumption Response when Wages are Sticky," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 07.11, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
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