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Fiscal stimulus in a credit crunch: the role of wage rigidity

Francesco Furlanetto ()

No 2009/08, Working Paper from Norges Bank

Abstract: In this paper we study the impact of an expansion in public spending in a credit constrained economy with sticky wages. The flexible wage version of the model implies strong expansionary effects on output and consumption but also a counterfactual increase in real wages. The introduction of sticky wages, besides being a realistic addition, solves these problems and preserves the expansionary effects on output and consumption. Moreover, once we introduce segmentation in the labor market, sticky wages are even essential to obtain expansionary effects.

Keywords: Sticky wages; rule-of-thumb consumers; fiscal shocks; financial frictions. (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-lab and nep-mac
Date: 2009-05-18
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2009_08

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