Efficiency wages, financial market integration, and the fiscal multiplier

We used a “new-open economy macroeconomic” model featuring a labor-market friction in the form of efficiency wages to analyze the implications of financial market integration for the fiscal multiplier. The fiscal multiplier measures the accumulated effect of fiscal policy on output. Conventional wis...

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Bibliographic Details
Published in:Journal of international money and finance 2009-09, Vol.28 (5), p.853-867
Main Authors: Alper Çenesiz, M., Pierdzioch, Christian
Format: Article
Language:English
Subjects:
Economic models
Efficiency
Efficiency wages
Financial integration
Financial market integration
Fiscal multiplier
Fiscal policy
International capital market
International finance
Labor market
Labour market structure
Money multiplier
Open economy macroeconomics
Open economy macroeconomics Financial market integration Fiscal multiplier
Securities markets
Studies
Wages & salaries
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Summary:We used a “new-open economy macroeconomic” model featuring a labor-market friction in the form of efficiency wages to analyze the implications of financial market integration for the fiscal multiplier. The fiscal multiplier measures the accumulated effect of fiscal policy on output. Conventional wisdom based on the basic textbook version of the classic Mundell–Fleming model suggests that the fiscal multiplier should become smaller as financial markets become more integrated. We show that a labor-market friction in the form of efficiency wages implies that financial market integration should increase the fiscal multiplier.
ISSN:0261-5606
1873-0639
DOI:10.1016/j.jimonfin.2008.08.013