TY - JOUR AU - Hagedorn, Marcus AU - Manovskii, Iourii AU - Mitman, Kurt TI - The Fiscal Multiplier JF - National Bureau of Economic Research Working Paper Series VL - No. 25571 PY - 2019 Y2 - February 2019 DO - 10.3386/w25571 UR - http://www.nber.org/papers/w25571 L1 - http://www.nber.org/papers/w25571.pdf N1 - Author contact info: Marcus Hagedorn Department of Economics University of Oslo Box 1095 Blindern 0317 Oslo, Norway E-Mail: marcus.hagedorn@econ.uio.no Iourii Manovskii Department of Economics University of Pennsylvania 160 McNeil Building 3718 Locust Walk Philadelphia, PA 19104 Tel: 215/898-6880 Fax: 215/573-2057 E-Mail: manovski@econ.upenn.edu Kurt Mitman Institute for International Economic Studies Stockholm University 106 91 Stockholm SWEDEN E-Mail: kurt.mitman@iies.su.se M3 - presented at "Economic Fluctuations and Growth Program Meeting", February 23, 2018 AB - We measure the size of the fiscal multiplier using a heterogeneous-agent model with incomplete markets, capital and rigid prices and wages. The environment encompasses the essential elements necessary for a quantitative analysis of fiscal policy. First, output is partially demand-determined due to pricing frictions in product and labor markets, so that a fiscal stimulus increases aggregate demand. Second, incomplete markets deliver a realistic distribution of dynamic consumption and investment responses to stimulus policies across the population. These elements give rise to the standard textbook Keynesian-cross logic which, and unlike conventional wisdom would suggest, is significantly reinforced in our dynamic forward looking model. We find that market incompleteness is key to determining the size of the fiscal multiplier, which is uniquely determined in our model for any combination of fiscal and monetary policies of interest. The multiplier is 1.34 if deficit-financed and 0.61 if contemporaneously tax-financed for a pegged nominal interest rate, with similar values in a liquidity trap. If monetary policy follows a Taylor rule, the numbers drop to 0.66 and 0.54, respectively. We elucidate the importance of market incompleteness for our results and contrast them to models featuring complete markets or hand-to-mouth consumers. ER -