We show that New Keynesian models with frictionless labor supply face a challenge: given standard parameters, they cannot simultaneously match plausible estimates of marginal propensities to consume (MPCs), marginal propensities to earn (MPEs), and fiscal multipliers. A HANK model with sticky wages provides a solution to this trilemma.

© 2021 The President and Fellows of Harvard College and the Massachusetts Institute of Technology
2021
The President and Fellows of Harvard College and the Massachusetts Institute of Technology

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