Working Paper: CEPR ID: DP15685
Authors: Tobias Broer; Per Krusell; Erik Berg
Abstract: We use an analytically tractable heterogeneous-agent (HANK) version of the standard New Keynesian model to show how the size of fiscal multipliers depends on i) the distribution of factor incomes, and ii) the source of nominal rigidities. With sticky prices but flexible wages, the standard representative-agent (RANK) model predicts large multipliers because profits fall after a fiscal stimulus and the resulting negative income effect makes the representative worker work harder.Our HANK model, where workers do not own stock and thus do not receive profit income, predicts smaller fiscal multipliers. In fact, they are smaller with sticky prices than with flexible prices. When wages are the source of nominal rigidity, in contrast, fiscal multipliers are close to one, independently of income heterogeneity and price stickiness.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income distribution (D31) | fiscal multiplier (E62) |
| falling profits after fiscal stimulus (E65) | labor supply (J20) |
| sticky prices (D41) | fiscal multiplier (E62) |
| wages rigidity (J31) | fiscal multiplier (E62) |
| profit income in representative-agent model (D33) | labor supply (J20) |
| absence of profit income in HANK model (E10) | labor supply (J20) |