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Downward nominal wage rigidity and state-dependent government spending multipliers

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  • Shen, Wenyi
  • Yang, Shu-Chun S.

Abstract

Despite much empirical evidence on business cycle-dependent government spending multipliers, the theoretical channels underlying such results are uncertain. In an environment with involuntary unemployment, this paper shows that downward nominal wage rigidity, which arises only in recessions, can generate business cycle-dependent government spending multipliers. In line with Keynesian views, a demand stimulus reduces unemployment in recessions and may not drive up inflation and wages as in expansions. Thus, the positive income effects from reduced unemployment and weaker crowding-out effects from a smaller increase in the real interest rate enhance the expansionary spending effects in recessions. The theoretical implications are largely consistent with existing empirical evidence on business cycle-dependent government spending effects on key macroeconomic variables.

Suggested Citation

  • Shen, Wenyi & Yang, Shu-Chun S., 2018. "Downward nominal wage rigidity and state-dependent government spending multipliers," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 11-26.
  • Handle: RePEc:eee:moneco:v:98:y:2018:i:c:p:11-26
    DOI: 10.1016/j.jmoneco.2018.04.006
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    Cited by:

    1. Julien Albertini & Stéphane Auray & Hafedh Bouakez & Aurélien Eyquem, 2019. "Taking off into the Wind: Unemployment Risk and State-Dependent Government Spending Multipliers," Post-Print halshs-02498579, HAL.
    2. Pan, Xiongfeng & Xu, Haitao & Li, Mengna & Zong, Tianjiao & Lee, Chew Tin & Lu, Yuduo, 2020. "Environmental expenditure spillovers: Evidence from an estimated multi-area DSGE model," Energy Economics, Elsevier, vol. 86(C).
    3. Benjamin Born & Francesco D'Ascanio & Gernot Müller & Johannes Pfeifer, 2019. "The Worst of Both Worlds: Fiscal Policy and Fixed Exchange Rates," CESifo Working Paper Series 7922, CESifo.
    4. Liu, Shih-fu & Huang, Wei-chi & Lai, Ching-chong, 2020. "Could Fiscal Policies Overcome a Deep Recession at the Zero Lower Bound?," MPRA Paper 101282, University Library of Munich, Germany.
    5. Aursland, Thor Andreas & Frankovic, Ivan & Kanik, Birol & Saxegaard, Magnus, 2020. "State-dependent fiscal multipliers in NORA - A DSGE model for fiscal policy analysis in Norway," Economic Modelling, Elsevier, vol. 93(C), pages 321-353.

    More about this item

    Keywords

    Business cycle-dependent multiplier; State dependent government spending effects; Downward nominal wage rigidity; Fiscal policy effects; New Keynesian models;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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