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

Daisuke Ida and Mitsuhiro Okano

The B.E. Journal of Macroeconomics, 2024, vol. 24, issue 2, 883-928

Abstract: This study examines the effect of nominal wage stickiness on the fiscal multiplier in a two-agent new Keynesian model. We demonstrate that in the case of sticky nominal wages, an increased share of liquidity-constrained (LC) consumers decreases the money-financed (MF) fiscal multiplier. Our model shows that the fiscal multiplier under an MF regime outperforms that under a debt-financed (DF) regime. Under empirically plausible calibration, the benchmark model indicates that the MF government-spending multiplier is 1.5–3.0, whereas the DF multiplier is 0.8–1.5. We also find that an increased share of LC consumers magnifies the tax-cut multiplier in the cases of MF and DF regimes despite nominal wage stickiness.

Keywords: money-financed regime; debt-financed regime; nominal wage stickiness; liquidity-constrained consumers; two-agent new Keynesian model (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Does nominal wage stickiness affect fiscal multiplier in a two-agent new Keynesian model? (2023)
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DOI: 10.1515/bejm-2023-0213

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