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Fiscal Shocks and the Consumption Response when Wages are Sticky

Francesco Furlanetto ()

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: In this paper we study the impact of a government spending shock on aggregate consumption, building on the GLV (Gali, Lopez-Salido and Valles (2007)) model. We show that the GLV model implies a counterfactual increase in the real wage, the interest rate and the in.ation rate. The introduction of sticky wages solves these problems and preserves the main result of the model, i.e. the positive response of consumption. Moreover, once we relax the common wage assumption, sticky wages are even essential to reproduce the positive response of consumption.

Keywords: sticky wages; rule-of-thumb consumers; fiscal shocks; firm-specific capital (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: 2007-10
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:07.11

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