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

  • Francesco Furlanetto

    ()

    (Norges Bank (Central Bank of Norway))

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.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2009/WP-20098/
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Paper provided by Norges Bank in its series Working Paper with number 2009/08.

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Length: 38 pages
Date of creation: 18 May 2009
Date of revision:
Handle: RePEc:bno:worpap:2009_08
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  24. Holden, Steinar & Wulfsberg, Fredrik, 2009. "How strong is the macroeconomic case for downward real wage rigidity?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 605-615, May.
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  28. Tommaso Monacelli & Roberto Perotti, 2008. "Openness and the Sectoral Effects of Fiscal Policy," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 395-403, 04-05.
  29. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
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