Fiscal Stimulus and Endogenous Firm Entry in a Monopolistic Competition Macroeconomic Model

Cheng†Wei Chang, Ching†Chong Lai and Juin†Jen Chang

The Japanese Economic Review, 2018, vol. 69, issue 2, 207-225

Abstract: This paper sets up a monopolistic competition model featuring the returns to production specialization. Some novel results are derived from the analysis. First, the effect of a fiscal stimulus on consumption may be positive or negative, depending crucially upon whether the production function is characterized by increasing or decreasing returns to production specialization. Second, following a fiscal expansion, increasing returns to specialization lead to a positive linkage between real wages and aggregate output, while decreasing returns to specialization result in a negative relationship between real wages and aggregate output. Third, a fiscal expansion may raise social welfare, provided that the degree of increasing returns to production specialization is sufficiently large.

Date: 2018
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