Representative agent meets class structure: imperfect competition and the balanced-budget multiplier

Leonardo Vera

Cambridge Journal of Economics, 2006, vol. 30, issue 5, 783-796

Abstract: Recently, New Keynesian economists (NKE) have been concerned with the effect of imperfect competition on the sign and size of the balanced-budget fiscal multiplier. This literature all came up with models based on a profit--income relationship in which imperfect competition increases the tax-financed fiscal multiplier. Accordingly, the higher the exercise of market power by firms, the greater the effectiveness of fiscal policy. In this paper, we argue that the New Keynesian results are very sensitive to a heroic simplification on which they rest: the representative agent. We show that in terms of the budget-balanced multiplier, a Kaleckian approach, where class structure matters, offers a richer set of results. Moreover, we develop a simple short-run rational agent optimisation model of the type used by NKE and introduce class structure into it. We demonstrate, in support of the Kaleckian approach, that even in a general equilibrium optimising framework, the balanced-budget multiplier is strictly decreasing in the degree of monopoly. Copyright 2006, Oxford University Press.

Date: 2006
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