Fiscal Policy, Monopolistic Competition and Finite Lives

B.J. Heijdra, J.E. Ligthart

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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

Keywords

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

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    Heijdra, B. J., & Ligthart, J. E. (2005). Fiscal Policy, Monopolistic Competition and Finite Lives. (CentER Discussion Paper; Vol. 2005-126). Macroeconomics.