WORKING PAPERS
Government Investment vs. Consumption: Fiscal Multipliers under Financial Frictions and a Two-Agent Framework (2026), joint with Wan, Q.
Does the composition of government spending matter for fiscal multipliers when financial markets are imperfect and households are heterogeneous? We address this question both empirically and structurally. Using state-dependent local projections on U.S. quarterly data, we show that government investment multipliers are substantially more sensitive to credit conditions than government consumption multipliers. We then develop a structural explanation in a medium-scale DSGE model that combines the financial intermediary framework of Sims and Wu (2021) with two-agent (TANK) household heterogeneity and a distinction between government investment and consumption. The model yields three main results. First, government investment and consumption produce nearly identical impact multipliers, but government investment generates substantially larger cumulative multipliers as public capital accumulation creates a supply-side channel that government consumption lacks. Second, the interaction between financial frictions and fiscal transmission is non-monotonic: moderate frictions amplify fiscal stimulus by raising the value of intermediary net worth, while severe frictions suppress impact multipliers but raise cumulative multipliers through a balance-sheet relaxation channel—an effect that is substantially stronger for government investment than for government consumption. Third, higher shares of rule-of-thumb households raise impact multipliers but reduce cumulative multipliers, as the stronger demand stimulus intensifies crowdingout through both the interest rate and the financial intermediary channels. These results are robust to alternative monetary-fiscal policy rule combinations.
State-Dependent Labour Mobility Responses to Macroeconomic Shocks: Does the Type of Recession Matter? (2026). (Online Appendix)
Do macroeconomic shocks affect labour mobility differently depending on the type of recession? Using state-dependent local projections applied to US sectoral mobility data (1947–2025), I examine nine identified shocks spanning demand, financial, uncertainty, geopolitical, and supply categories. I find that recession type matters substantially. Uncertainty and financial shocks dominate baseline mobility dynamics, while demand-side shocks show null unconditional effects. However, these null effects mask important state dependence: the same shock can increase mobility during demand recessions but show muted responses during stagflation. Fiscal news shocks provide the clearest illustration—no significant baseline effect, yet strong positive effects during demand recessions that are statistically different from the near-zero stagflation response. The mechanism operates through downward nominal wage rigidity: when inflation is low, firms cannot adjust real wages through price increases, forcing adjustment through worker reallocation. These findings imply that stabilisation policy must account not only for whether the economy is in recession, but also for what type.
[soon as SUERF Policy Brief Mar 2026, No 1382]
This paper was presented at:
10th International Ioannina Meeting on Applied Economics and Finance, (June 2026, Syros, Greece).
Oil Price Shocks and US House Prices: Theory and Evidence (2026), joint with Li, Q. (Online Appendix)
We investigate how oil price shocks transmit to US housing markets. Using a structural VAR identified with oil supply news shocks, we find that a 10% oil price increase reduces house prices by 1–1.2%. To investigate the mechanisms underlying this transmission, we develop a two-sector New Keynesian DSGE model with financial frictions where oil enters production as an intermediate input. Oil shocks generate asymmetric sectoral inflation—raising non-housing goods prices more than housing goods prices—which drives down the relative price of housing. Financial frictions amplify this transmission through distinct channels. Bank balance sheet constraints amplify the housing price decline through the standard financial accelerator: the oil-induced recession depresses capital prices, erodes bank net worth, and tightens credit conditions. Collateral constraints similarly amplify the decline through a feedback loop where falling housing prices tighten borrowing constraints. When both frictions operate simultaneously, they reinforce each other, producing the largest housing price decline among all model specifications. These findings suggest that macroprudential policy targeting bank leverage or loan-to-value ratios could moderate the transmission of energy price shocks to housing markets.
This paper was presented at:
18th Annual Meeting of The Portuguese Economic Journal, (July 2025, Lisbon, Portugal).
XXVII Applied Economics Meeting (June 2025, Murcia, Spain).
XXV Conference on International Economics and XII Meeting on International Economics, (Presented by coauthor, June 2024, Alicante, Spain);
The 2024 RCEA International Conference in Economics, Econometrics, and Finance, (May 2024, London, UK).
24th Scottish Economic Society Annual Conference, (April 2024, Glasgow, UK).
17th South-Eastern European Economic Research Workshop of the Bank of Albania, (Presented by coauthor, December 2023, Tirana, Albania).
Sectoral shocks, labor mobility and heterogeneity in price/wage stickiness (2024)
In this paper, I show that not only the existence of differences in the distribution of within-sector prices has important consequences for the transmission of shocks, but also the dispersion of wages between sectors especially when focusing on the degree of labor mobility in the economy. The findings indicate an equivalence in the impact of wage and price heterogeneity across sectors, especially in their effect on total inflation. Using a New-Keynesian medium-scale DSGE model for the US economy, I show that a single-sector model is unable to capture these features. The multi-sector version of the model estimated with sectoral data explains more of the variability in output from sectoral price shocks compared to the one-sector version of the model.
This paper was presented at:
Bank of Albania Friday Seminar Series, (May 2025, Tirana, Albania).
54th Annual Conference of the Money, Macro and Finance Society, (September 2023, Portsmouth, UK).
Society for Computational Economics 29th International Conference on Computing in Economics and Finance, (July 2023, Nice, France).
27th International Conference on Macroeconomic Analysis and International Finance, (May 2023, Crete, Greece).
47th Simposio de la Asociación Española de Economía-Spanish Economic Association (SAEe), (December 2022, Valencia, Spain).
25th Central Bank of Colombia Macroeconomic Modelling Workshop (November 2022, Virtual).
2nd Bank of Lithuania Invited Lecture Series and Conference (September 2022, Vilnius, Lithuania).
EcoMod2022 International Conference on Economic Modelling and Data Science (September 2022, Slovenia/Online).
Warsaw International Economic Meeting 17th Conference (June 2022, Warsaw, Poland).
Economics Research Students Annual Conference (June 2021, University of Exeter).
Graduate Workshop (February 2021, University of Exeter).
The effects of government spending under trend inflation: theory and empirics (2024). (Reject & Resubmit EER) Old version.
This paper presents empirical evidence that long-run inflation is important in explaining cross-country differences in the response of private consumption to a government spending shock. Contributing to the debate on the size of fiscal multipliers, I motivate my analysis by documenting, in a quarterly dataset of OECD countries, that countries with high long-run inflation display a relatively higher response of private consumption to an increase in government spending. It is on this basis that I develop a small-scale DSGE model with positive trend inflation and show that the higher the trend inflation in an economy is, the higher the response of private consumption to a government spending shock. If we interpret positive trend inflation as the long-run inflation target, I show, convincingly, that the monetary stance of the central banks has important implications for the effectiveness of short-run fiscal policy interventions. Finally, I calculate consumption multipliers. I find that the consumption multipliers in countries with low trend inflation are below one, while under high trend inflation are higher than 2. These multipliers are consistent with the empirical evidence, which I provide in the paper.
This paper was presented at:
2nd Baltic Central Banks’ Lecture Series and Workshop (May 2025, Riga, Latvia).
The 6th Baltic Economic Conference, (Tallinn, Estonia, June 2024).
Warwick Macro and International Workshop, (Coventry, UK, June 2024).
16th Annual Meeting of The Portuguese Economic Journal, Braga, Portugal, (July 2023).
EcoMod2023 International Conference on Economic Modeling and Data Science (July 2023, Prague).
19th Euroframe Conference on Economic Policy Issues in Europe, Sciences Po, Paris, France, (June 2023).
The Royal Economic Society’s 2021 Annual Conference (April 2021, Online).
The Italian Economic Association 60th Annual Scientific Conference (October 2019, Palermo).
Economics Research Students Annual Conference (June 2019, University of Exeter).
Graduate Workshop (November 2018, University of Exeter).
Publications
Sabaj, E (2024). How do sectoral elasticities affect the transmission of monetary shocks? Journal of Economic Studies (ABS 2), doi:
https://doi.org/10.1108/JES-05-2024-0317
[SUERF Policy Brief, Nov 2024, No 1026]
Troug, H and Sabaj, E (2024). Monetary Policy in a Small Open Economy with Non-Separable Government Spending. Journal of Economic Studies (ABS 2), doi: https://doi.org/10.1108/JES-10-2022-0513
Sabaj, E, Sbia, R., and Troug, H (2023). Does it matter where and how governments spend? Economics Letters (ABS 3), doi:
https://doi.org/10.1016/j.econlet.2023.111158
[SUERF Policy Brief, Jun 2023, No 606]
PRE-PHD RESEARCH WORK
Kahveci, Mustafa and Sabaj, Ernil (2017). Determinant of Housing Rents in Urban Albania: An Empirical Hedonic Price Application with NSA Survey Data. Eurasian Journal of Economics and Finance, Vol. 5(2), p. 51-65, 2017.
Available at: https://eurasianpublications.com/wp-content/uploads/2021/02/EJEF-5.2.4.pdf
Sabaj, Ernil (2017): Cyclical Behaviour of Fiscal Policy in the Western Balkans. (Dormant)
Available at: https://mpra.ub.uni-muenchen.de/84279/
Sabaj, Ernil and Kahveci, Mustafa (2016): Forecasting tax revenues in an emerging economy: The case of Albania. (Dormant)
Available at: https://mpra.ub.uni-muenchen.de/84404/