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Does Nominal Wage Stickiness Affect Fiscal Multiplier in a Two-Agent New Keynesian Model?

  • Daisuke Ida EMAIL logo and Mitsuhiro Okano
Published/Copyright: August 20, 2024

Abstract

This study examines the effect of nominal wage stickiness on the fiscal multiplier in a two-agent new Keynesian model. We demonstrate that in the case of sticky nominal wages, an increased share of liquidity-constrained (LC) consumers decreases the money-financed (MF) fiscal multiplier. Our model shows that the fiscal multiplier under an MF regime outperforms that under a debt-financed (DF) regime. Under empirically plausible calibration, the benchmark model indicates that the MF government-spending multiplier is 1.5–3.0, whereas the DF multiplier is 0.8–1.5. We also find that an increased share of LC consumers magnifies the tax-cut multiplier in the cases of MF and DF regimes despite nominal wage stickiness.

JEL Classification: E52; E58

Corresponding author: Daisuke Ida, Faculty of Economics, Momoyama Gakuin University, 1-1, Manabino, Izumi, Osaka 594-1198, Japan; and Research Fellow, Graduate School of Economics, Kobe University, Kobe, Japan, E-mail: 

We would like to thank Arpad Abraham and two anonymous referees for helpful comments and suggestions. We also thank Masataka Eguchi, Kohei Hasui, Shigeto Kitano, Ryuzo Miyao, Eiji Okano, and Masahiko Shibamoto for their helpful comments and suggestions. Ida was supported by JSPS KAKENHI grant numbers JP20K01784 and JP24K04971. Okano was supported by JSPS KAKENHI grant number JP20K13531. All remaining errors are our own.


Award Identifier / Grant number: JP20K01784

Award Identifier / Grant number: JP20K13531

Award Identifier / Grant number: JP24K04971

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Received: 2023-06-06
Accepted: 2024-07-19
Published Online: 2024-08-20

© 2024 Walter de Gruyter GmbH, Berlin/Boston

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