Fiscal stimulus and the role of wage rigidity

In this paper we study the impact of an expansion in public spending in an economy characterized by limited asset market participation and sticky wages. The flexible wage version of the model implies strong expansionary effects on output and consumption but also a counterfactual increase in real wages. The introduction of sticky wages, besides being a realistic addition, solves this problem and preserves the expansionary effects on output and consumption. Moreover, once we introduce segmentation in the labor market, sticky wages are even essential to obtain expansionary effects.