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Fiscal Shocks and the Consumption Response when Wages are Sticky

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  • Francesco FURLANETTO

Abstract

In this paper we study the impact of a government spending shock on aggregate consumption, building on the GLV (Gali, Lopez-Salido and Valles (2007)) model. We show that the GLV model implies a counterfactual increase in the real wage, the interest rate and the in.ation rate. The introduction of sticky wages solves these problems and preserves the main result of the model, i.e. the positive response of consumption. Moreover, once we relax the common wage assumption, sticky wages are even essential to reproduce the positive response of consumption.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 07.11.

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Length: 46 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:lau:crdeep:07.11

Contact details of provider:
Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Keywords: sticky wages; rule-of-thumb consumers; fiscal shocks; firm-specific capital;

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References

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Citations

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Cited by:
  1. Luca Sessa & Libero Monteforte & Lorenzo Forni, 2007. "The general equilibrium effects of fiscal policy: estimates for the euro area," 2007 Meeting Papers 352, Society for Economic Dynamics.
  2. Francesco Furlanetto & Martin Seneca, 2007. "Rule-of-thumb consumers, productivity and hours," Working Paper 2007/05, Norges Bank.
  3. P. Jacob & -, 2010. "Deep Habits, Nominal Rigidities and the Response of Consumption to Fiscal Expansions," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/641, Ghent University, Faculty of Economics and Business Administration.
  4. Jorge A. Fornero, 2010. "Ricardian Equivalence Proposition in a NK DSGE Model for two Large Economies: The EU and the US," Working Papers Central Bank of Chile 563, Central Bank of Chile.

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