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Fiscal shocks and real rigidities

  • Francesco Furlanetto

    (Norges Bank (Central Bank of Norway))

  • Martin Seneca

    ()

    (University of Aarhus)

In this paper we show that empirically plausible results on the effects of fiscal shocks in Galí, López-Salido and Vallés (2007) rely on a high degree of price stickiness and a large percentage of financially constrained agents. Real rigidities in the form of habit persistence, fixed firm-specific capital and Kimball demand curves interact in interesting ways with nominal and finan- cial rigidities and allow us to reproduce the same consumption multiplier as Galí et al. (2007) under only two and a half quarters of price stickiness, in- stead of four, and only 30 per cent of constrained agents instead of 50 per cent. Therefore, real rigidities are useful in the study of fiscal shocks in addi- tion to monetary and productivity shocks as has been shown in the previous literature.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2008/WP-200810/
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Paper provided by Norges Bank in its series Working Paper with number 2008/10.

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Length: 41 pages
Date of creation: 23 Jun 2008
Date of revision:
Handle: RePEc:bno:worpap:2008_10
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