The world’s economic systems have been repeatedly hit by the COVID-19 epidemic, which has led to the resurgence of domestic demand problems and made it more complicated. What is the root cause of domestic demand problems and how will it be solved? Few studies have responded in a more complete way, but they offer the possibility to take demand issues further. Therefore, it is valuable and practical to observe the state of domestic demand and find ways to boost it from the perspective of income distribution.
This paper tests the effect of labor bargaining power shocks and wage stickiness on domestic demand, as well as the effect of the combination of fiscal and monetary policies and minimum wage policies by constructing a heterogeneous household DSGE model that incorporates the wage determination mechanism. In addition, the previous results are corroborated by using residential sector survey data. The results show that: Firstly, sluggish domestic demand in China is related to the uneven distribution of residents’ income, and it is more obvious in low-income groups. Secondly, policy coordination can deal with sluggish domestic demand, and fiscal policies are most effective.
To expand domestic demand, this paper suggests that: Firstly, we should improve income distribution, including the establishment of a flexible wage adjustment mechanism, the protection of labor bargaining power, etc. Secondly, we should build a combination regulatory framework of various macro policies, and supplement black box testing, policy target balancing, policy matching timing, etc.
The possible contribution of this paper lies in that: Firstly, it presents the solutions of domestic demand problems from the perspective of income distribution, which provides a feasible idea for strengthening China’s domestic demand and policy regulation. Secondly, it builds a heterogeneous household DSGE model that includes intra-labor splits, wage negotiations and wage stickiness, as distinct from the New Keynesian model, which is a new attempt and can explain domestic demand volatility in China. Thirdly, it verifies the feasibility of policy coordination by extrapolating from theory to residential sector behavior analysis, capturing the generalizability of findings.