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

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  • Ida Daisuke

    (Faculty of Economics, Momoyama Gakuin University, 1-1, Manabino, Izumi, Osaka 594-1198, Japan)

  • Okano Mitsuhiro

    (Faculty of Economics, Osaka Gakuin University, 2-36-1 Kishibeminami, Suita-City, Osaka 564-8511, Japan)

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.

Suggested Citation

  • Ida Daisuke & Okano Mitsuhiro, 2024. "Does Nominal Wage Stickiness Affect Fiscal Multiplier in a Two-Agent New Keynesian Model?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 24(2), pages 883-928.
    • Handle: RePEc:bpj:bejmac:v:24:y:2024:i:2:p:883-928:n:1007
    DOI: 10.1515/bejm-2023-0213
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    More about this item

    Keywords

    money-financed regime; debt-financed regime; nominal wage stickiness; liquidity-constrained consumers; two-agent new Keynesian model;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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