Sticky Wages, Monetary Policy and Fiscal Policy Multipliers

39 Pages Posted: 28 Mar 2017 Last revised: 5 Jan 2019

See all articles by Bill Dupor

Bill Dupor

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Jingchao Li

East China University of Political Science and Law (ECUPL)

Rong Li

Renmin University of China

Date Written: 2017-03-27

Abstract

This paper demonstrates how adding nominal wage rigidity to a standard sticky price model can create a mechanism by which increases in government spending cause increases in consumption. The increase in output arising from government purchases puts upward pressure on the price level. At a fixed short-run nominal wage, this bids down the real wage, which leads producers to increase labor demand. Increased labor demand allows households to both finance the tax bill associated with the government spending as well as increase their own consumption. Our approach does not rely upon existing ingredients for generating large fiscal multipliers, such as the zero lower bound, borrowing constrained households or an interaction between consumption and government purchases in the utility function.

Keywords: government spending, multipliers, sticky wages

JEL Classification: E52, E62

Suggested Citation

Dupor, William Daniel and Li, Jingchao and Li, Rong, Sticky Wages, Monetary Policy and Fiscal Policy Multipliers (2017-03-27). FRB St. Louis Working Paper No. 2017-7. Available at SSRN: https://ssrn.com/abstract=2942031 or http://dx.doi.org/10.20955/wp.2017.007

William Daniel Dupor (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Jingchao Li

East China University of Political Science and Law (ECUPL) ( email )

1575 Wanhangdu Rd.
Changning, Shanghai 200042
China

Rong Li

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China

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