A Keynesian Intertemporal Synthesis (KIS) Model: Towards a unified and empirically grounded framework for fiscal policy

TL;DR

This paper introduces a new Keynesian Intertemporal Synthesis (KIS) model with a CES production function, integrating empirical evidence to better understand fiscal policy effects, income distribution, and crisis dynamics.

Contribution

It develops the KIS-CES model, incorporating household heterogeneity, non-standard preferences, and empirical findings, providing a unified framework for fiscal policy analysis.

Findings

Endogenous nonlinear fiscal multipliers that increase in crises

Public investment multiplier exceeds consumption multiplier

Elasticity of substitution modulates income distribution and crowding-in effects

Abstract

This paper develops a new generation of the Keynesian Intertemporal Synthesis (KIS) Model, a macroeconomic framework designed to reconcile the empirical strengths of the Post-Keynesian (PK) and New Keynesian (NK) traditions. The central innovation of this work is the abandonment of the traditional Cobb-Douglas production function in favor of a Constant Elasticity of Substitution (CES) specification. This modification is directly motivated by the compelling evidence from the meta-analysis by Gechert et al. (2021), which emphatically rejects the hypothesis of a unit elasticity of substitution between capital and labor. We integrate this finding with the conclusions from a wide range of meta-analyses on the state-dependent heterogeneity of fiscal multipliers (Gechert and Rannenberg, 2018), the productivity of public capital (Bom and Ligthart, 2014), the effectiveness hierarchy of spending instruments (Gechert, 2015), and the empirical failure of Ricardian Equivalence (Stanley, 1998). The resulting KIS-CES model, while based on intertemporal optimization, incorporates household heterogeneity, non-standard preferences that value wealth and penalize debt, and a monetary policy constrained by the zero lower bound. The mathematical derivations reveal that the elasticity of substitution, calibrated to an empirically plausible value of $\sigma < 1$, becomes a key parameter that modulates income distribution and magnifies the crowding-in effect of public investment. The model generates an endogenous MPC, a nonlinear fiscal multiplier that increases dramatically in crises, and a multiplier for public investment that is structurally higher than that for consumption, thus offering a unified, rigorous, and, above all, empirically disciplined theoretical framework.