Fiscal Policy, Monopolistic Competition and Finite Lives

B.J. Heijdra, J.E. Ligthart

Research output: Working paperDiscussion paperOther research output

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Abstract

The paper studies the short-run, transitional, and long-run output effects of permanent and temporary shocks in public consumption under various financing methods.To this end, a dynamic macroeconomic model for a closed economy is developed, which features a perfectly competitive final goods sector and a monopolistically competitive intermediate goods sector.Finitely lived households consume final goods, supply labor, and save part of their income.Amongst the findings for a permanent rise in public consumption are: (i) monopolistic competition increases the absolute value of the balanced-budget output multiplier; (ii) positive long-run output multipliers are obtained only if the generational turnover effect is dominated by the intertemporal labor supply effect; (iii) short-run output multipliers under lump-sum tax financing are smaller than long-run output multipli-ers if labor supply is elastic; and (iv) bond financing reduces the size of long-run output multipliers as compared to lump-sum tax financing and may give rise to non-monotonic adjustment paths if labor supply is sufficiently elastic and the speed of adjustment of lump-sum taxes is not too high.Temporary bond-financed fiscal shocks are shown to yield: (i) permanent effects on output; and (ii) negative long-run output multipliers.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages43
Volume2005-126
Publication statusPublished - 2005

Publication series

NameCentER Discussion Paper
Volume2005-126

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Monopolistic competition
Fiscal policy
Multiplier
Labor supply
Financing
Tax
Public consumption
Short-run
Permanent shock
Turnover
Bond financing
Fiscal shocks
Speed of adjustment
Intermediate goods
Income
Household
Temporary shock
Macroeconomic models

Keywords

  • fiscal policy
  • output multipliers
  • Yaari-Blanchard model
  • overlapping generations
  • monopolistic competition
  • love of variety
  • temporary fiscal shocks

Cite this

Heijdra, B. J., & Ligthart, J. E. (2005). Fiscal Policy, Monopolistic Competition and Finite Lives. (CentER Discussion Paper; Vol. 2005-126). Tilburg: Macroeconomics.
Heijdra, B.J. ; Ligthart, J.E. / Fiscal Policy, Monopolistic Competition and Finite Lives. Tilburg : Macroeconomics, 2005. (CentER Discussion Paper).
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Heijdra, BJ & Ligthart, JE 2005 'Fiscal Policy, Monopolistic Competition and Finite Lives' CentER Discussion Paper, vol. 2005-126, Macroeconomics, Tilburg.

Fiscal Policy, Monopolistic Competition and Finite Lives. / Heijdra, B.J.; Ligthart, J.E.

Tilburg : Macroeconomics, 2005. (CentER Discussion Paper; Vol. 2005-126).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

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N2 - The paper studies the short-run, transitional, and long-run output effects of permanent and temporary shocks in public consumption under various financing methods.To this end, a dynamic macroeconomic model for a closed economy is developed, which features a perfectly competitive final goods sector and a monopolistically competitive intermediate goods sector.Finitely lived households consume final goods, supply labor, and save part of their income.Amongst the findings for a permanent rise in public consumption are: (i) monopolistic competition increases the absolute value of the balanced-budget output multiplier; (ii) positive long-run output multipliers are obtained only if the generational turnover effect is dominated by the intertemporal labor supply effect; (iii) short-run output multipliers under lump-sum tax financing are smaller than long-run output multipli-ers if labor supply is elastic; and (iv) bond financing reduces the size of long-run output multipliers as compared to lump-sum tax financing and may give rise to non-monotonic adjustment paths if labor supply is sufficiently elastic and the speed of adjustment of lump-sum taxes is not too high.Temporary bond-financed fiscal shocks are shown to yield: (i) permanent effects on output; and (ii) negative long-run output multipliers.

AB - The paper studies the short-run, transitional, and long-run output effects of permanent and temporary shocks in public consumption under various financing methods.To this end, a dynamic macroeconomic model for a closed economy is developed, which features a perfectly competitive final goods sector and a monopolistically competitive intermediate goods sector.Finitely lived households consume final goods, supply labor, and save part of their income.Amongst the findings for a permanent rise in public consumption are: (i) monopolistic competition increases the absolute value of the balanced-budget output multiplier; (ii) positive long-run output multipliers are obtained only if the generational turnover effect is dominated by the intertemporal labor supply effect; (iii) short-run output multipliers under lump-sum tax financing are smaller than long-run output multipli-ers if labor supply is elastic; and (iv) bond financing reduces the size of long-run output multipliers as compared to lump-sum tax financing and may give rise to non-monotonic adjustment paths if labor supply is sufficiently elastic and the speed of adjustment of lump-sum taxes is not too high.Temporary bond-financed fiscal shocks are shown to yield: (i) permanent effects on output; and (ii) negative long-run output multipliers.

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KW - Yaari-Blanchard model

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KW - monopolistic competition

KW - love of variety

KW - temporary fiscal shocks

M3 - Discussion paper

VL - 2005-126

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Heijdra BJ, Ligthart JE. Fiscal Policy, Monopolistic Competition and Finite Lives. Tilburg: Macroeconomics. 2005. (CentER Discussion Paper).