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State-dependent fiscal multipliers in NORA - A DSGE model for fiscal policy analysis in Norway

Thor Andreas Aursland, Ivan Frankovic (), Birol Kanık and Magnus Saxegaard

Economic Modelling, 2020, vol. 93, issue C, 321-353

Abstract: We develop a novel medium-scale DSGE model, called NORA, for fiscal policy analysis in Norway. NORA contains a sheltered and exposed sector allowing us to model wage bargaining between a labor union and the exposed sector, reflecting Scandinavian wage formation institutions. Wages are subject to a downward nominal wage rigidity (DNWR). Inspired by many countries' fiscal policy responses to the Great Recession and the coronavirus pandemic, we investigate the model's ability to generate state-dependent fiscal multipliers. We find, that both the zero lower bound on nominal interest rates and DNWR individually can account for higher fiscal multipliers during recessions. In joint presence, however, the existence of DNWR reduces the multiplier at the ZLB. Moreover, the DNWR significantly relaxes the paradox of toil at the ZLB. We show that the state-dependency is robust to alternative assumptions about the origin of the recession, the nature of the fiscal stimulus and its financing source.

Keywords: Fiscal policy; Fiscal multiplier; State-dependency; Zero lower bound; Downward nominal wage rigidity (search for similar items in EconPapers)
JEL-codes: E24 E62 E63 H20 H30 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2020.07.017

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