MPCs, MPEs and Multipliers: A Trilemma for New Keynesian Models
We establish an impossibility result for New Keynesian models with a frictionless labor market: these models 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.
An earlier version of this paper circulated under the title “A Note on Multipliers in NK Models with GHH Preferences”. We thank the editor Yuriy Gorodnichenko, two anonymous referees, as well as Florin Bilbiie, Gabriel Chodorow-Reich, Alisdair McKay, Ben Moll, and Valerie Ramey for useful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.