Fiscal policy, monopolistic competition, and finite lives

Arbeitspapier

The 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 out- put 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 bondfinanced fiscal shocks are shown to yield: (i) permanent effects on output; and (ii) negative long-run output multipliers.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 1661

Classification and Topics

• Classification: Wirtschaft ; General Aggregative Models: Keynes; Keynesian; Post-Keynesian ; Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices ; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
• Subject: fiscal policy ; output multipliers ; Yaari-Blanchard model ; overlapping generations ; monopolistic competition ; love of variety ; Finanzpolitik ; Multiplikator ; Monopolistischer Wettbewerb ; Overlapping Generations ; Theorie ; Finanzierung ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Heijdra, Ben J. ; Ligthart, Jenny E.
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/19125
• Last update: 10.03.2025, 11:43 AM CET