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

Francesco Morelli ()
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Francesco Morelli: Link Campus University

No 606, CEIS Research Paper from Tor Vergata University, CEIS

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.

Keywords: Fiscal multipliers; New-Keynesian model; Markov-Switching estimation; Hand-tomouth consumers; Sticky wages (search for similar items in EconPapers)
JEL-codes: C32 E12 E32 E52 E62 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2025-06-26, Revised 2025-06-26
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