Fiscal Policy, Business Cycles and Labor-Market Fluctuations
In this paper we study the effects and transmission of fiscal policy in a dynamic general equilibrium sticky-price model with non-Ricardian agents, distortionary taxation and a Walrasian labor market. We derive a simple analytical framework for fiscal policy similar to the workhorse 'new synthesis' model widely used in the monetary policy literature. We then explore theoretical conditions under which government spending (whether financed by lump-sum or income taxes) can increase private consumption as observed in the data. We conclude that making the model fare better in this respect necessarily makes it fare worse in what concerns real wage fluctuations. Additionally, we show that the model can generate non-Keynesian effects of fiscal policy when participation to asset markets is limited enough and the monetary policy rule is passive.
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