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Fiscal stimulus in a credit crunch: the role of wage rigidity

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  • Francesco Furlanetto

    () (Norges Bank (Central Bank of Norway))

Abstract

In this paper we study the impact of an expansion in public spending in a credit constrained economy with sticky wages. The flexible wage version of the model implies strong expansionary effects on output and consumption but also a counterfactual increase in real wages. The introduction of sticky wages, besides being a realistic addition, solves these problems and preserves the expansionary effects on output and consumption. Moreover, once we introduce segmentation in the labor market, sticky wages are even essential to obtain expansionary effects.

Suggested Citation

  • Francesco Furlanetto, 2009. "Fiscal stimulus in a credit crunch: the role of wage rigidity," Working Paper 2009/08, Norges Bank.
  • Handle: RePEc:bno:worpap:2009_08
    as

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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2009/WP-20098/
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    References listed on IDEAS

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    More about this item

    Keywords

    Sticky wages; rule-of-thumb consumers; fiscal shocks; financial frictions.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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