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Sticky wages, private consumption, and Fiscal multipliers

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  • Dupor, Bill
  • Li, Jingchao
  • Li, Rong

Abstract

This paper demonstrates how adding nominal wage rigidity to a standard, closed economy sticky price model can by itself create a mechanism by which increases in government spending cause increases in consumption. The increase in output arising from government purchases puts upward pressure on the price level. At a fixed short-run nominal wage, this bids down the real wage, which leads producers to increase labor demand. Increased labor demand allows households to both finance the tax bill associated with the government spending as well as increase their own consumption. Our approach does not rely upon existing ingredients for generating large fiscal multipliers, such as the zero lower bound, borrowing constrained households or an interaction between consumption and government purchases in the utility function.

Suggested Citation

  • Dupor, Bill & Li, Jingchao & Li, Rong, 2019. "Sticky wages, private consumption, and Fiscal multipliers," Journal of Macroeconomics, Elsevier, vol. 62(C).
  • Handle: RePEc:eee:jmacro:v:62:y:2019:i:c:s0164070419300394
    DOI: 10.1016/j.jmacro.2019.103157
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    2. Ogawa, Shogo, 2022. "Survey of non-Walrasian disequilibrium economic theory," MPRA Paper 115011, University Library of Munich, Germany.
    3. Shogo Ogawa & Hiroaki Sasaki, 2022. "Numerical analysis of the disequilibrium monetary growth model: secular stagnation, slow convergence, and cyclical fluctuations," Evolutionary and Institutional Economics Review, Springer, vol. 19(1), pages 369-394, April.
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    6. Ogawa, Shogo, 2022. "Capital and inventory investments under quantity constraints: A microfounded Metzlerian model," MPRA Paper 111906, University Library of Munich, Germany.

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    More about this item

    Keywords

    Government spending; Multipliers; Sticky wages;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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