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Profits, Markups and Entry: Fiscal Policy in an Open Economy

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  • Javier Coto-Martínez
  • Huw D. Dixon

Abstract

In this paper we develop a general model of an imperfectly competitive small open economy. There is a traded and non-traded sector, whose outputs are combined in order to produce a single final good that can be either consumed or invested. We make general assumptions about preferences and technology, and analyze the impact of fiscal policy on the economy. We find that the fiscal multiplier is between zero and one, and provide sufficient conditions for it to be increasing in the degree of imperfect competition. We also are able to compare the multiplier under free-entry and with a fixed number of firms and welfare. A simple graphical representation of the model is developed.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 550.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_550

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Keywords: Imperfect competition; open economy; fiscal policy;

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References

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  1. Huw David Dixon, 2000. "Modelling Market Power in Labour and Product Markets in a Dynamic Economy," Ekonomia, Cyprus Economic Society and University of Cyprus, Cyprus Economic Society and University of Cyprus, vol. 4(2), pages 104-121, Winter.
  2. Turnovsky, S.J., 1990. "Tariffs And Sectoral Adjustments In An Open Economy," Working Papers, University of Washington, Department of Economics 90-13, University of Washington, Department of Economics.
  3. Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
  4. Sergio Rebelo, 1997. "What Happens When Countries Peg Their Exchange Rates? (The Real Side of Monetary Reforms)," NBER Working Papers 6168, National Bureau of Economic Research, Inc.
  5. 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.
  6. Obstfeld, Maurice, 1989. "Fiscal deficits and relative prices in a growing world economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 23(3), pages 461-484, May.
  7. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  8. Turnovsky, S.J. & Sen, P., 1990. "Fiscal Policy, Capital Accumulation, And Debt In An Open Economy," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 90-18, Department of Economics at the University of Washington.
  9. Claus Hansen, 1999. "Long-run impact of increased wage pressure," Journal of Economics, Springer, Springer, vol. 69(2), pages 141-157, June.
  10. Rudiger Dornbusch, 1981. "Real Interest Rates, Home Goods, and Optimal External Borrowing," NBER Working Papers 0779, National Bureau of Economic Research, Inc.
  11. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," 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. 36(1), pages 101-37, February.
  12. Sen, P. & Turnovsky, S.J., 1990. "Investment Tax Credit In An Open Economy," Working Papers, University of Washington, Department of Economics 90-09, University of Washington, Department of Economics.
  13. Dixon, Huw & Lawler, Phillip, 1996. " Imperfect Competition and the Fiscal Multiplier," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 98(2), pages 219-31, June.
  14. Stephen J. Turnovsky, 1997. "International Macroeconomic Dynamics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262201119, December.
  15. Brock, Philip L & Turnovsky, Stephen J, 1994. "The Dependent-Economy Model with Both Traded and Nontraded Capital Goods," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 306-25, October.
  16. Dixon, Huw, 1987. "A Simple Model of Imperfect Competition with Walrasian Features," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 134-60, March.
  17. Cornes,Richard, 1992. "Duality and Modern Economics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521336017.
  18. 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.
  19. Ghosh, Atish R., 1992. "Fiscal policy, the terms of trade, and the external balance," Journal of International Economics, Elsevier, Elsevier, vol. 33(1-2), pages 105-125, August.
  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. N. Gregory Mankiw, 1987. "Imperfect Competition and the Keynesian Cross," NBER Working Papers 2386, National Bureau of Economic Research, Inc.
  22. van Wincoop, Eric, 1993. "Structural adjustment and the construction sector," European Economic Review, Elsevier, Elsevier, vol. 37(1), pages 177-201, January.
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Citations

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Cited by:
  1. Philipp Harms, 2002. "Deregulation and the Current Account," Working Papers 02.07, Swiss National Bank, Study Center Gerzensee.
  2. Heijdra, B.J. & Ligthart, J.E., 2006. "The Transitional Dynamics of Fiscal Policy in Small Open Economies," Open Access publications from Tilburg University urn:nbn:nl:ui:12-199394, Tilburg University.
  3. Anthony J. Makin, 2013. "The policy (in)effectiveness of government spending in a dependent economy," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(3), pages 287-301, September.
  4. Marta Aloi & Huw D. Dixon, 2002. "Entry Dynamics, Capacity Utilisation and Productivity in a Dynamic Open Economy," CESifo Working Paper Series 716, CESifo Group Munich.
  5. Olivier CARDI & Romain RESTOUT, 2010. "Sectoral Effects of Tax Reforms in an Open Economy," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2010045, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  6. Olivier CARDI & Romain RESTOUT, 2011. "Fiscal Shocks in a Two-Sector Open Economy," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2011006, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  7. Olivier Cardi & Romain Restout, 2012. "Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy," Working Papers of BETA 2012-01, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  8. Luís F. Costa & Huw Dixon, 2009. "Fiscal Policy under Imperfect Competition: A Survey," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2009/25, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  9. Margarita Katsimi & Vassilis Sarantides, 2012. "The Impact Of Fiscal Policy On Profits," Economic Inquiry, Western Economic Association International, vol. 50(4), pages 1050-1068, October.
  10. Costa, Luís F. & Dixon, Huw David, 2011. "Fiscal policy under imperfect competition with flexible prices: An overview and survey," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 5(3), pages 1-57.

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