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The State-Dependent Consumption Response to Government Spending in US: a Markov-Switching TANK Model with Sticky Wages

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  • Francesco Morelli

    (Link Campus University)

Abstract

This paper examines the effectiveness of public spending in different phases of the business cycle through a state-dependent macroeconomic model. We estimate a two-agent New-Keynesian (TANK) model with sticky wages in a Markov-switching framework for the U.S. economy (1960–2013). The model extends Gali, L´opez-Salido, and Vall´es 2007 by incorporating wage rigidity as in Colciago 2011. Our findings indicate that the share of hand-to-mouth agents (?) plays a crucial role in determining fiscal multipliers, with higher ? values associated with recessions and stronger public spending effects. While monetary policy regime shifts influence outcomes, ? remains the key driver of multiplier heterogeneity. Our results suggest that temporary fiscal interventions during downturns yield the highest impact, reconciling elements of both neoclassical and New-Keynesian perspectives. These insights have important policy implications for the design of countercyclical fiscal policies.

Suggested Citation

  • Francesco Morelli, 2025. "The State-Dependent Consumption Response to Government Spending in US: a Markov-Switching TANK Model with Sticky Wages," CEIS Research Paper 606, Tor Vergata University, CEIS, revised 26 Jun 2025.
    • Handle: RePEc:rtv:ceisrp:606
    as

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    References listed on IDEAS

    as
    1. Marco Bernardini & Gert Peersman, 2018. "Private debt overhang and the government spending multiplier: Evidence for the United States," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(4), pages 485-508, June.
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    Keywords

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    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; Modern Monetary Theory
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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