Advanced Search
MyIDEAS: Login to save this paper or follow this series

Fiscal Policy, Monopolistic Competition, and Finite Lives

Contents:

Author Info

  • Ben J. Heijdra
  • Jenny Ligthart

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 out- put multipliers under lump-sum tax financing are smaller than long-run output multipliers 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2006/wp-cesifo-2006-02/cesifo1_wp1661.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1661.

as in new window
Length:
Date of creation: 2006
Date of revision:
Handle: RePEc:ces:ceswps:_1661

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

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

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Berger, Helge & Neugart, Michael, 2011. "Labor courts, nomination bias, and unemployment in Germany," European Journal of Political Economy, Elsevier, Elsevier, vol. 27(4), pages 659-673.
  2. Timo Trimborn & Karl-Josef Koch & Thomas M. Steger, 2004. "Multi-dimensional transitional dynamics : a simple numerical procedure," CER-ETH Economics working paper series, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich 04/35, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  3. Axel Dreher & Jan-Egbert Sturm, 2006. "Do IMF and World Bank Influence Voting in the UN General Assembly?," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 06-137, KOF Swiss Economic Institute, ETH Zurich.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 297-308, June.
  5. Sexauer, Martin & Kleiber, Christian & Wälde, Klaus, 2005. "Bequests, taxation and the distribution of wealth in a general equilibrium model," W.E.P. - Würzburg Economic Papers, University of Würzburg, Chair for Monetary Policy and International Economics 61, University of Würzburg, Chair for Monetary Policy and International Economics.
  6. Philippe Choné & Laurent Linnemer, 2006. "Assessing Horizontal Mergers under Uncertain Efficiency Gains," CESifo Working Paper Series, CESifo Group Munich 1726, CESifo Group Munich.
  7. Carlo Altavilla & Paul De Grauwe, 2006. "Forecasting and Combining Competing Models of Exchange rate Determination," Discussion Papers, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy 5_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  8. Rafael Lalive, 2006. "How do Extended Benefits Affect Unemployment Duration? A Regression Discontinuity Approach," CESifo Working Paper Series, CESifo Group Munich 1765, CESifo Group Munich.
  9. Alessandro Cigno, 2006. "Is there a social security tax wedge?," CHILD Working Papers, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY wp04_06, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  10. Auriol, Emmanuelle & Picard, Pierre M, 2006. "Government Outsourcing: Public Contracting with Private Monopoly," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5643, C.E.P.R. Discussion Papers.
  11. Alessandro Balestrino, 2006. "Tax Avoidance, Endogenous Social Norms, and the Comparison Income Effect," CESifo Working Paper Series, CESifo Group Munich 1758, CESifo Group Munich.
  12. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
  13. Posch, Olaf & Wälde, Klaus, 2005. "Natural volatility, welfare and taxation," W.E.P. - Würzburg Economic Papers, University of Würzburg, Chair for Monetary Policy and International Economics 57, University of Würzburg, Chair for Monetary Policy and International Economics.
  14. Muendler, Marc-Andreas & Becker, Sascha O., 2006. "Margins of Multinational Labor Substitution," IZA Discussion Papers 2131, Institute for the Study of Labor (IZA).
  15. Andrew Mountford & Harald Uhlig, 2008. "What are the Effects of Fiscal Policy Shocks?," NBER Working Papers 14551, National Bureau of Economic Research, Inc.
  16. Heijdra, Ben J., 2009. "Foundations of Modern Macroeconomics," OUP Catalogue, Oxford University Press, Oxford University Press, edition 2, number 9780199210695, October.
  17. Marko Köthenbürger, 2006. "Ex-Post Redistribution in a Federation: Implications for Corrective Policy," CESifo Working Paper Series, CESifo Group Munich 1754, CESifo Group Munich.
  18. Benassy, Jean-Pascal, 1996. "Monopolistic competition, increasing returns to specialization and output persistence," Economics Letters, Elsevier, Elsevier, vol. 52(2), pages 187-191, August.
  19. David Encaoua & Yassine Lefouili, 2005. "Choosing Intellectual Protection: Imitation, Patent Strength and Licensing," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers), HAL halshs-00496942, HAL.
  20. Heijdra, Ben J & van der Ploeg, Frederick, 1996. "Keynesian Multipliers and the Cost of Public Funds under Monopolistic Competition," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(438), pages 1284-96, September.
  21. Devereux, Michael B. & Head, Allen C. & Lapham, Beverly J., 1996. "Aggregate fluctuations with increasing returns to specialization and scale," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 20(4), pages 627-656, April.
  22. Hassan Molana & Thomas Moutos, 1991. "A Note on Taxation, Imperfect Competition and the Balanced Budget Multiplier," Working Papers Series, University of Stirling, Division of Economics 91/4, University of Stirling, Division of Economics.
  23. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers, Rutgers University, Department of Economics 200115, Rutgers University, Department of Economics.
  24. Jordi Galí & J. David López Salido & Javier Vallés, 2003. "Understanding the effects of government spending on consumption," Banco de Espa�a Working Papers, Banco de Espa�a 0321, Banco de Espa�a.
  25. Bell, Clive & Gersbach, Hans, 2013. "Growth and enduring epidemic diseases," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(10), pages 2083-2103.
  26. Steven Brakman & Harry Garretsen & Charles van Marrewijk, 2006. "Agglomeration and Aid," CESifo Working Paper Series, CESifo Group Munich 1750, CESifo Group Munich.
  27. Markku Lanne, Helmut Luetkepohl, 2006. "Identifying Monetary Policy Shocks via Changes in Volatility," Economics Working Papers, European University Institute ECO2006/23, European University Institute.
  28. Bernoth, Kerstin & Wolff, Guntram B., 2006. "Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia," Discussion Paper Series 1: Economic Studies, Deutsche Bundesbank, Research Centre 2006,19, Deutsche Bundesbank, Research Centre.
  29. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 315-34, June.
  30. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2760, C.E.P.R. Discussion Papers.
  31. Peter Egger & Simon Loretz & Michael Pfaffermayr & Hannes Winner, 2006. "Corporate Taxation and Multinational Activity," CESifo Working Paper Series, CESifo Group Munich 1773, CESifo Group Munich.
  32. Linnemann, Ludger & Schabert, Andreas, 2003. " Fiscal Policy in the New Neoclassical Synthesis," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(6), pages 911-29, December.
  33. Axel Dreher & Jan-Egbert Sturm & Heinrich W. Ursprung, 2006. "The impact of globalization on the composition of government expenditures: Evidence from panel data," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 06-141, KOF Swiss Economic Institute, ETH Zurich.
  34. Judd, Kenneth L., 1982. "An alternative to steady-state comparisons in perfect foresight models," Economics Letters, Elsevier, Elsevier, vol. 10(1-2), pages 55-59.
  35. Holzner, Christian & Meier, Volker & Werding, Martin, 2010. "Workfare, monitoring, and efficiency wages," Journal of Macroeconomics, Elsevier, Elsevier, vol. 32(1), pages 157-168, March.
  36. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 389-405, June.
  37. Leith, Campbell & Wren-Lewis, Simon, 2000. "Interactions between Monetary and Fiscal Policy Rules," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(462), pages C93-108, March.
  38. Robert Fenge & Jakob von Weizsäcker, 2006. "Mixing Bismarck and Child Pension Systems:An Optimum Taxation Approach," CESifo Working Paper Series, CESifo Group Munich 1751, CESifo Group Munich.
  39. Robert Fenge & Volker Meier, 2006. "Subsidies for Wages and Infrastructure: How to Restrain Undesired Immigration," CESifo Working Paper Series, CESifo Group Munich 1741, CESifo Group Munich.
  40. Brakman, Steven & Heijdra, Ben J., 2002. "The monopolistic competition revolution in retrospect," CCSO Working Papers, University of Groningen, CCSO Centre for Economic Research 200215, University of Groningen, CCSO Centre for Economic Research.
  41. Devereux, Michael B. & Head, Allen C. & Lapham, Beverly J., 1993. "Monopolistic competition, technology shocks, and aggregate fluctuations," Economics Letters, Elsevier, Elsevier, vol. 41(1), pages 57-61.
  42. Saku Aura & Thomas Davidoff, 2006. "Supply Constraints and Housing Prices," Working Papers, Department of Economics, University of Missouri 0607, Department of Economics, University of Missouri.
  43. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  44. George W. Stadler, 1994. "Real Business Cycles," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 32(4), pages 1750-1783, December.
  45. Hornstein, Andreas, 1993. "Monopolistic competition, increasing returns to scale, and the importance of productivity shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(3), pages 299-316, June.
  46. Christa Hainz, 2007. "Business Groups in Emerging Markets: Financial Control and Sequential Investments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 163(2), pages 336-355, June.
  47. Chris van Klaveren & Bernard M.S. van Praag & Henriette Maassen van den Brink, 2006. "A Collective Household Model of Time Allocation - a Comparison of Native Dutch and Immigrant Households in the Netherlands," CESifo Working Paper Series, CESifo Group Munich 1753, CESifo Group Munich.
  48. Ronald MacDonald & Cezary Wójcik, 2006. "Catching-up, Inflation Differentials and Credit Booms in a Heterogeneous Monetary Union: Some Implications for EMU and new EU Member States," CESifo Working Paper Series, CESifo Group Munich 1761, CESifo Group Munich.
  49. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 232-237, May.
  50. Coto-Martinez, Javier, 2006. "Public capital and imperfect competition," Journal of Public Economics, Elsevier, Elsevier, vol. 90(1-2), pages 349-378, January.
  51. Michele Cavallo & Fabio Ghironi, 2000. "Net Foreign Assets and the Exchange Rate: Redux Revived," Boston College Working Papers in Economics, Boston College Department of Economics 505, Boston College Department of Economics, revised 01 Feb 2002.
  52. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, Elsevier, vol. 2(4), pages 319-337.
  53. Maarten Bosker & Harry Garretsen, 2006. "Geography Rules Too! Economic Development and the Geography of Institutions," CESifo Working Paper Series, CESifo Group Munich 1769, CESifo Group Munich.
  54. Satyajit Chatterjee & Russell W. Cooper, 1993. "Entry and exit, product variety and the business cycle," Working Papers 93-30, Federal Reserve Bank of Philadelphia.
  55. Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 1996. "Monopolistic Competition, Increasing Returns, and the Effects of Government Spending," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 28(2), pages 233-54, May.
  56. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, Elsevier, vol. 52(1), pages 41-47, July.
  57. Startz, Richard, 1989. "Monopolistic Competition as a Foundation for Keynesian Macroeconomic Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(4), pages 737-52, November.
  58. Ronald Ian McKinnon & Gunther Schnabl, 2006. "China’s Exchange Rate and International Adjustment in Wages, Prices, and Interest Rates: Japan Déjà Vu?," CESifo Working Paper Series, CESifo Group Munich 1720, CESifo Group Munich.
  59. Jürgen von Hagen & Haiping Zhang, 2006. "Financial Liberalization in a Small Open Economy," CESifo Working Paper Series, CESifo Group Munich 1771, CESifo Group Munich.
  60. Johannes Becker & Clemens Fuest & Thomas Hemmelgarn, 2006. "Corporate Tax Reform and Foreign Direct Investment in Germany – Evidence from Firm-Level Data," CESifo Working Paper Series, CESifo Group Munich 1722, CESifo Group Munich.
  61. Heijdra, Ben J, 1998. "Fiscal Policy Multipliers: The Role of Monopolistic Competition, Scale Economies, and Intertemporal Substitution in Labour Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 659-96, August.
  62. Eric Hillebrand & Gunther Schnabl & Yasemin Ulu, 2006. "Japanese Foreign Exchange Intervention and the Yen/Dollar Exchange Rate: A Simultaneous Equations Approach Using Realized Volatility," CESifo Working Paper Series, CESifo Group Munich 1766, CESifo Group Munich.
  63. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262100711, December.
  64. Marcel Gérard & Fernando Ruiz, 2006. "Interjurisdictional Competition for Higher Education and Firms," CESifo Working Paper Series, CESifo Group Munich 1719, CESifo Group Munich.
  65. Selma Mahfouz & Richard Hemming & Michael Kell, 2002. "The Effectiveness of Fiscal Policy in Stimulating Economic Activity," IMF Working Papers, International Monetary Fund 02/208, International Monetary Fund.
  66. Cardia, Emanuela, 1991. "The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 28(3), pages 411-434, December.
  67. Didier Laussel & Raymond Riezman, 2006. "Fixed Transport Costs and International Trade," CESifo Working Paper Series, CESifo Group Munich 1764, CESifo Group Munich.
  68. Ludger Linnemann, 2004. "Tax Base and Crowding-in Effects of Balanced Budget Fiscal Policy," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 106(2), pages 273-297, 06.
  69. Roland Straub & Günter Coenen, 2005. "Non-Ricardian Households and Fiscal Policy in an Estimated DSGE Model of the Euro Area," Computing in Economics and Finance 2005, Society for Computational Economics 102, Society for Computational Economics.
  70. Rios-Rull, Jose-Victor, 1996. "Life-Cycle Economies and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(3), pages 465-89, July.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Olivier Cardi & Romain Restout, 2007. "Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model," Post-Print, HAL halshs-00174574, HAL.
  2. Jenny Ligthart & Gerard C. van der Meijden, 2010. "Coordinated Tax-Tari Reforms, Informality, and Welfare Distribution," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1029, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Koessler, Frédéric & Forges, Françoise, 2008. "Long persuasion games," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/179, Paris Dauphine University.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_1661. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.