Monopolistic Competition, Increasing Returns, and the Effects of Government Spending

Michael Devereux, Allen Head () and Beverly Lapham

Journal of Money, Credit and Banking, 1996, vol. 28, issue 2, 233-54

Abstract: The dynamic effects of government spending are considered in a general equilibrium model with monopolistic competition and increasing returns. In the economy, changes in the level of government spending endogenously raise total factor productivity, even though the spending itself is entirely wasteful. This leads to several results which contrast with the effects of government spending policies in environments with constant returns. A permanent increase in government spending increases the steady-state wage and may increase steady-state consumption. Also, regardless of its persistence, a temporary shock to government spending may simultaneously raise output, investment, the real wage, and consumption. Copyright 1996 by Ohio State University Press.

Date: 1996
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