Fiscal policy, monopolistic competition, and finite lives

Ben J. Heijdra, Jenny E. Ligthart*

*Corresponding author for this work

    Research output: Contribution to journalArticleAcademicpeer-review

    3 Citations (Scopus)

    Abstract

    This paper studies the short-run, transitional, and long-run output effects of permanent and temporary shocks in public consumption under various financing methods. To this end, a dynamic macroeconomic model for a closed economy is developed, which features a perfectly competitive final goods sector and a monopolistically competitive intermediate goods sector. Finitely lived households consume final goods, supply labor, and save part of their income. Amongst the findings for a permanent rise in public consumption are: (i) monopolistic competition increases the absolute value of the balanced-budget output multiplier; (ii) positive long-run output multipliers are obtained only if the generational turnover effect is dominated by the intertemporal labor supply effect; (iii) short-run output multipliers under lump-sum tax financing are smaller than long-run output multipliers if labor supply is elastic; and (iv) bond financing reduces the size of long-run output multipliers as compared to lump-sum tax financing and may give rise to non-monotonic adjustment paths if labor supply is sufficiently elastic and the speed of adjustment of lump-sum taxes is not too high. Temporary bond-financed fiscal shocks are shown to yield: (i) permanent effects on output; and (ii) negative long-run output multipliers. (C) 2006 Elsevier B.V. All rights reserved.

    Original languageEnglish
    Pages (from-to)325-359
    Number of pages35
    JournalJournal of economic dynamics & control
    Volume31
    Issue number1
    DOIs
    Publication statusPublished - Jan-2007

    Keywords

    • fiscal policy
    • output multipliers
    • Yaari-Blanchard model
    • overlapping generations
    • monopolistic competition
    • love of variety
    • temporary fiscal shocks
    • SMALL OPEN-ECONOMY
    • INCREASING RETURNS
    • AGGREGATE FLUCTUATIONS
    • IMPERFECT COMPETITION
    • PRODUCTIVITY SHOCKS
    • SCALE
    • MODELS
    • SPECIALIZATION
    • MULTIPLIERS
    • MONETARY

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