Fiscal policy, entry and capital accumulation: Hump-shaped responses

Paulo Brito () and Huw Dixon

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 10, 2123-2155

Abstract: In this paper we consider the entry and exit of firms in a Ramsey model with capital and an endogenous labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. The costs of entry (exit) are quadratic in the flow of new firms. The number of firms becomes a second state variable and the entry dynamics gives rise to a richer set of dynamics than in the standard case: in particular, there is likely to be a hump shaped response of output to a fiscal shock with maximum effect after impact and before steady-state is reached. Output and capital per firm are also likely to be hump shaped.

Keywords: Entry; Ramsey; Fiscal policy; Macroeconomic dynamics (search for similar items in EconPapers)
JEL-codes: D92 E22 E32 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (11)

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Working Paper: Fiscal policy, entry and capital accumulation: hump-shaped responses (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:10:p:2123-2155

DOI: 10.1016/j.jedc.2013.03.005

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