Market segmentation and spending multipliers

When workers are sluggish to change sectors and government demand is concentrated on few sectors, an increase in government spending has limited impact on production in other sectors and multipliers are higher. Compared to a one-sector model, a model calibrated to the 404 sectors of the U.S. economy raises multipliers by 0.5 when preferences feature no wealth effects on labor supply and by more if wealth effects are present. Relative price movements observed in response to spending shocks are consistent with the model’s mechanism. The model suggests that multipliers depend on the composition of stimulus packages.