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Fiscal stimulus in a simple macroeconomic model of monopolistic competition with firm heterogeneity

Cheng-wei Chang (), Ching-chong Lai and Ting-wei Lai
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Cheng-wei Chang: Tunghai University
Ting-wei Lai: National Chengchi University

The Japanese Economic Review, 2020, vol. 71, issue 3, No 5, 447-477

Abstract: Abstract This paper studies the impact of a fiscal stimulus by setting up a simple monopolistic competition model with firm heterogeneity in productivity. Several main results are derived from the general equilibrium analysis. First, a rise in firm heterogeneity per se leads to decreases in aggregate output and aggregate consumption, but raises the aggregate price level when the variety-enhancing effect is sufficiently strong. Second, a fiscal expansion will bring about a positive effect on aggregate consumption, provided that the variety-enhancing effect is relatively strong or the extent of firm heterogeneity is relatively small. Finally, a fiscal expansion may raise social welfare, depending on the size of the variety-enhancing effect and the extent of firm heterogeneity.

Keywords: Monopolistic competition; Firm heterogeneity; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E30 E62 L11 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s42973-019-00025-8

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