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

Yoon Jo () and Sarah Zubairy

No 30025, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We consider a New Keynesian model with downward nominal wage rigidity (DNWR) and show that government spending is much 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. In a demand-driven recession, inflation falls, preventing real wages from falling, leading to unemployment, while inflation rises in a supply-driven recession limiting the consequences of DNWR on employment. We document supporting empirical evidence, using both historical time series data and cross-sectional data from U.S. states.

JEL-codes: E24 E32 E62 (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-dge and nep-mac
Note: ME
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Citations: View citations in EconPapers (19)

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Related works:
Journal Article: State-Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations (2025)
Working Paper: State dependent government spending multipliers: Downward nominal wage rigidity and sources of business cycle fluctuations (2021)
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