Imperfect Competition, Underemployment Equilibria and Fiscal Policy

Marco Pagano

Economic Journal, 1990, vol. 100, issue 401, 440-63

Abstract: It is often claimed that the demand externality created by imperfect competition can provide an analytical basis for Keynesian fiscal policy prescriptions. Here this demand externality is embedded in a model of monopolistic competition where saving and employment are determined by optimizing choices. It turns out that underemployment equilibria do exist, that there is scope for fiscal intervention, but that Keynesian fiscal prescriptions are turned on their head. Thus, demand externalities among imperfect competitors do not provide a general theoretical basis for these prescriptions, unless supplemented by other deviations from the Walrasian standard in the labor or capital market. Copyright 1990 by Royal Economic Society.

Date: 1990
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