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Fiscal stimulus in a credit crunch: the role of wage rigidity

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Author Info
Francesco Furlanetto () (Norges Bank (Central Bank of Norway))

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Abstract

In this paper we study the impact of an expansion in public spending in a credit constrained economy with sticky wages. The flexible wage version of the model implies strong expansionary effects on output and consumption but also a counterfactual increase in real wages. The introduction of sticky wages, besides being a realistic addition, solves these problems and preserves the expansionary effects on output and consumption. Moreover, once we introduce segmentation in the labor market, sticky wages are even essential to obtain expansionary effects.

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Publisher Info
Paper provided by Norges Bank in its series Working Paper with number 2009/08.

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Length: 38 pages
Date of creation: 18 May 2009
Date of revision:
Handle: RePEc:bno:worpap:2009_08

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Related research
Keywords: Sticky wages; rule-of-thumb consumers; fiscal shocks; financial frictions.;

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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This page was last updated on 2009-12-4.

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