Fiscal policy, pricing frictions and monetary accommodation

Abstract

We investigate the theoretical conditions for effectiveness of government consumption expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place when monetary policy is accommodative lead to large output multipliers in normal times. The 2009-2010 packages need not produce significant output multipliers, may have moderate debt effects, and only generate temporary inflation. Expenditure expansions accompanied by deficit/debt consolidations schemes may lead to short run output gains but their success depends on how monetary policy and expectations behave. Trade openness and the cyclicality of the labor wedge explain cross-country differences in the magnitude of the multipliers.JEL classification: C32, E62, E63.

Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis

“…In the longer horizon the capital income tax and the public investment shock result in the highest multipliers (the present value cumulative 5 year multiplier totals -0.52 and 0.72 respectively). The government consumption impact multiplier obtained in this study is higher than the average impact multiplier of 0.89 obtained in the empirical study of fiscal policy in the UK conducted by Canova and Pappa (2011). The government transfers shock results in a relatively lower multiplier when compared to the remaining fiscal policy instruments.…”

“…These firms simply follow the partial indexation rule: P j,t = π γp t−1 P j,t−1 . The remaining fraction of companies (1 − p ) choose P t to maximise the profits subject to the demand (equation 14). Maximisation results in equation (19) for newly optimised prices: 11 Equation (18) implies that for profits to be equal zero in the steady-state: f c =…”

Fiscal Policy and Lending Relationships

“…In addition, the increase in hours worked due to the scal expansion is generally accompanied by a boost in the real wage (Pappa, 2005;Galí et al, 2007;Caldara and Kamps, 2008;Pappa, 2009;Fragetta and Melina, 2011). Finally, there is evidence that the price mark-up drops after an increase in government expenditures (Monacelli and Perotti, 2008;Canova and Pappa, 2011). In the FP model, when the economy is hit by an expansionary government spending shock, a negative wealth eect, caused by the absorption of resources by the government, makes consumption and leisure less aordable, stimulates labor supply and causes a drop in the real wage, while the price mark-up stays constant by construction.…”

Fiscal Policy and Lending Relationships

“…In addition, the increase in hours worked due to the scal expansion is generally accompanied by a boost in the real wage (Pappa, 2005;Galí et al, 2007;Caldara and Kamps, 2008;Pappa, 2009;Fragetta and Melina, 2011). Finally, there is evidence that the price mark-up drops after an increase in government expenditures (Monacelli and Perotti, 2008;Canova and Pappa, 2011). In the FP model, when the economy is hit by an expansionary government spending shock, a negative wealth e ect, caused by the absorption of resources by the government, makes consumption and leisure less a ordable, stimulates labor supply and causes a drop in the real wage, while the price mark-up stays constant by construction.…”