Keynesian Multipliers and the Cost of Public Funds under Monopolistic Competition

Ben Heijdra () and Frederick (Rick) van der Ploeg

Economic Journal, 1996, vol. 106, issue 438, 1284-96

Abstract: The authors extend macroeconomic models of imperfect competition with Keynesian features to allow for nonunitary elasticities between leisure and consumption and the effect of product variety on multipliers and welfare. Provided preference for diversity is sufficiently strong, the real national income multiplier for a given rise in real public spending is larger under free than under restricted entry and exit of firms. This implies a procyclical real consumer wage. With lump-sum taxes, the marginal cost of public funds is below unity. Optimal public spending may be countercyclical. More priority for public goods raises the long-run cost of public funds. Copyright 1996 by Royal Economic Society.

Date: 1996
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