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Fiscal multipliers, trend inflation, and endogenous price stickiness: Evidence from the U.S

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  • Gulenkov, Ilya

Abstract

A remarkably protracted surge in inflation in the U.S. has had a profound impact on the price- and wage-setting behavior. These changes suggest that the economy could have entered a regime characterized by higher trend inflation. While the impact of trend inflation on monetary policy effectiveness is well-studied, the effects on fiscal policy transmission has been largely overlooked. This study analyzes the fiscal transmission under different inflation regimes. The empirical analysis using state-dependent local projections reveals that in the post-WWII U.S. history fiscal multipliers in a high-inflation regime have been larger. This effect is driven by a crowding-in of consumption, which does not happen in the low-inflation state. We rationalize our findings withing a Markov-switching New Keynesian model with endogenous price stickiness and non-separable preferences. The model demonstrates that when different degree of monetary accommodation interacts with the switching mechanism, consumption is crowded-out in a low-inflation regime and crowded-in when trend inflation is high.

Suggested Citation

  • Gulenkov, Ilya, 2025. "Fiscal multipliers, trend inflation, and endogenous price stickiness: Evidence from the U.S," Journal of Macroeconomics, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:jmacro:v:86:y:2025:i:c:s0164070425000643
    DOI: 10.1016/j.jmacro.2025.103728
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