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

The trilemma


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.

The Review of Economics and Statistics 105(3), pp. 700-712