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Fiscal Policy, Monopolistic Competition and Finite Lives

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  • Heijdra, B.J.
  • Ligthart, J.E.

    (Tilburg University, Center for Economic Research)

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.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2005-126.

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Date of creation: 2005
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Handle: RePEc:dgr:kubcen:2005126

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

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Cited by:
  1. Ligthart, J.E. & Meijden, G.C. van der, 2010. "Coordinated Tax-Tariff Reforms, Informality, and Welfare Distribution," Discussion Paper 2010-61, Tilburg University, Center for Economic Research.
  2. Olivier Cardi & Romain Restout, 2007. "Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model," Working Papers 0720, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  3. Forges, Françoise & Koessler, Frédéric, 2008. "Long persuasion games," Journal of Economic Theory, Elsevier, vol. 143(1), pages 1-35, November.

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