State-Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations

Yoon Joo Jo and Sarah Zubairy

American Economic Journal: Macroeconomics, 2025, vol. 17, issue 1, 379-413

Abstract: In a New Keynesian model with downward nominal wage rigidity (DNWR), we show that government spending is more effective in stimulating output in a low-inflation recession relative to a high-inflation recession. The government spending multiplier is large when DNWR binds, but the nature of recession matters due to the opposing response of inflation and, consequently, for real wages. Using US historical time series data, we provide evidence of larger spending multipliers in low-inflation recessions and the importance of the depth of recessions. We also employ cross-sectional data from US states to document supporting evidence on multipliers and our proposed mechanism.

JEL-codes: E12 E24 E31 E32 E62 H50 (search for similar items in EconPapers)
Date: 2025
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Related works:
Working Paper: State Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations (2022)
Working Paper: State dependent government spending multipliers: Downward nominal wage rigidity and sources of business cycle fluctuations (2021)
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DOI: 10.1257/mac.20220156

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