Fiscal policy, entry and capital accumulation: hump-shaped responses

Paulo Brito () and Huw Dixon

No E2012/7, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: In this paper we consider the entry and exit of firms in a Ramsey model with capital and an endogenous labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. The costs of entry (exit) are quadratic in the flow of new firms. The number of firms becomes a second state variable and the entry dynamics gives rise to a richer set of dynamics than in the standard case: in particular, there is likely to be a hump shaped response of output to a fiscal shock with maximum impact after impact and before steady-state is reached. Output and capital per firm are also likely to be hump shaped.

Keywords: Entry; Ramsey; fiscal policy; macroeconomic dynamics (search for similar items in EconPapers)
JEL-codes: D92 E22 E32 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2012-04
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Fiscal policy, entry and capital accumulation: Hump-shaped responses (2013)
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