DP14977 MPCs, MPEs and Multipliers: A Trilemma for New Keynesian Models

Author(s): Adrien Auclert, Bence Bardóczy, Matthew Rognlie
Publication Date: June 2020
Date Revised: March 2021
Keyword(s): Fiscal multipliers, HANK, MPC, MPE
JEL(s): D52, E52, E62, H31
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14977

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.