Does Nominal Wage Stickiness Affect Fiscal Multiplier in a Two-agent New Keynesian Model?

Abstract

This study examines the effect of nominal wage stickiness on the fiscal multiplier in a two-agent new Keynesian model. Under fully flexible nominal wages, an increased share of liquidity-constrained (LC) consumers amplifies the fiscal multiplier in the cases of money-financed (MF) and debt-financed (DF) regimes. In the case of sticky nominal wages, an increase in the share of LC consumers drastically decreases the MF fiscal multiplier. We also demonstrate that even in the presence of nominal wage stickiness and LC consumers, the fiscal multiplier under an MF regime outperforms that under a DF regime. Furthermore, this paper shows that under the fiscal stimulus via a tax cut, an increased share of LC consumers magnifies the fiscal multiplier in the cases of MF and DF regimes.

Date
Aug 23, 2023 2:00 PM — 3:30 PM
Location
Meeting Room at RIEB (Annex, 2nd Floor)