Nominal rigidities equilibria in a non-Ricardian economy

Denis Vîntu

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the macroeconomic implications of nominal rigidities in a non-Ricardian economy, where households face borrowing constraints and do not fully internalize the government’s intertemporal budget constraint. Departing from the Ricardian equivalence framework, we show that fiscal policy plays a central role in shaping aggregate demand when nominal wages or prices adjust sluggishly. The interaction between sticky prices, liquidity-constrained households, and active fiscal policy generates non-neutral effects of government spending and taxation, amplifying short-run fluctuations. Using a simplified dynamic model, we demonstrate how nominal rigidities magnify fiscal multipliers and alter the transmission of monetary policy, particularly under conditions of limited asset market participation. These findings highlight the importance of accounting for both non-Ricardian behavior and nominal stickiness when evaluating stabilization policy in economies with incomplete financial markets.

Keywords: Nominal rigidity; Price stickiness; Wage rigidity; Sticky prices; Sticky wages; Inflation persistence; Monetary policy transmission; Labor market inflexibility; Menu costs; Contractual rigidity; New Keynesian economics; Phillips curve; Price adjustment; Wage adjustment; Expectations (rational and adaptive); External shocks; Economic fluctuations; Macro stabilization; Small open economy; Moldova economy (or country-specific context) (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 E32 E52 E58 (search for similar items in EconPapers)
Date: 2025-08, Revised 2025-08
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