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The Fiscal Multiplier

Kurt Mitman, Iourii Manovskii () and Marcus Hagedorn
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Marcus Hagedorn: University of Oslo

No 1383, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the size of the fiscal multiplier in a model with incomplete markets and rigid prices and wages. Allowing for incomplete markets instead of complete markets---the prevalent assumption in the literature---comes with two advantages. First, the incomplete markets model delivers a realistic distribution of the marginal propensity to consume across the population, whereas all households counterfactually behave according to the permanent income hypothesis if markets are complete. Second, in our model the response of prices, output, consumption and employment is uniquely determined by fiscal policy for any monetary policy including the zero-lower bound (ZLB) as opposed to most of the previous literature, where an infinite number of equilibria exists, leaving the researcher to arbitrarily pick one. Our preliminary findings indicate that the impact multiplier is quite large between 2 and 3 depending on whether tax or deficit financing is used and increase to values above 3 in a liquidity trap.

New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2017
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Working Paper: The Fiscal Multiplier (2019) Downloads
Working Paper: The Fiscal Multiplier (2019) Downloads
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