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The persistence of government expenditure shocks and the effect of monopolistic competition on the fiscal multiplier

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  • Philipp Harms

Abstract

In this paper, we demonstrate that the influence of monopolistic competition in the product market on an economy's impact response to fiscal shocks depends on the persistence of these shocks. While short-lived increases in lump-sum financed government expenditure have a stronger effect on labor supply if prices are above marginal costs, the response of employment decreases in the markup if shocks are highly persistent. However, we also show that, while the impact response of labor supply to temporary government expenditure shocks may be reduced by monopolistic competition, the fiscal multiplier is always higher if firms have market power. Copyright 2002, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 54 (2002)
Issue (Month): 1 (January)
Pages: 44-55

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Handle: RePEc:oup:oxecpp:v:54:y:2002:i:1:p:44-55

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Cited by:
  1. Costa, Luís F. & Dixon, Huw David, 2010. "Fiscal policy under imperfect competition: A survey," Economics Discussion Papers, Kiel Institute for the World Economy 2010-14, Kiel Institute for the World Economy.
  2. Javier Andrés & José Emilio Boscá & Javier Ferri, 2011. "Household Leverage and Fiscal Multipliers," Working Papers, International Economics Institute, University of Valencia 1103, International Economics Institute, University of Valencia.

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