Fiscal Policy, Monopolistic Competition, and Finite Lives

Ben Heijdra () and Jenny Ligthart

No 1661, CESifo Working Paper Series from CESifo

Abstract: 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 bond-financed fiscal shocks are shown to yield: (i) permanent effects on output; and (ii) negative long-run output multipliers.

Keywords: fiscal policy; output multipliers; Yaari-Blanchard model; overlapping generations; monopolistic competition; love of variety; temporary fiscal shocks (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-mac and nep-pbe
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Fiscal policy, monopolistic competition, and finite lives (2007)
Working Paper: Fiscal Policy, Monopolistic Competition and Finite Lives (2006)
Working Paper: Fiscal Policy, Monopolistic Competition and Finite Lives (2005)
Working Paper: Fiscal Policy, Monopolistic Competition and Finite Lives (2005)
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