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Effectiveness of Fiscal Policy in a Model of Imperfect Competition with Transactions Money

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  • Hassan Molana

Abstract

This paper examines the effectiveness of fiscal policy in a general equilibrium macromodel with transactions money and an oligopolistic product market. The results suggest that although money may be neutral and play no direct role as a policy instrument, its indirect impact on the effectiveness of fiscal policy can be quite substantial. In particular, when money balances feature as a choice variable in the households' objective function, (i) fiscal policy becomes ineffective as the weight attached to money is reduced; (ii) the fiscal multiplier becomes negative when the elasticity of substitution between money and leisure exceeds unity; and (iii) it is possible that policy effects are in fact enhanced as the product market becomes more competitive.
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Suggested Citation

  • Hassan Molana, 1999. "Effectiveness of Fiscal Policy in a Model of Imperfect Competition with Transactions Money," Dundee Discussion Papers in Economics 106, Economic Studies, University of Dundee.
    • Handle: RePEc:dun:dpaper:106
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    References listed on IDEAS

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    1. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
    2. Dixon, Huw, 1987. "A Simple Model of Imperfect Competition with Walrasian Features," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 134-160, March.
    3. Molana, Hassan & Moutos, Thomas, 1992. "A Note on Taxation, Imperfect Competition and the Balanced Budget Multiplier," Oxford Economic Papers, Oxford University Press, vol. 44(1), pages 68-74, January.
    4. Azariadis, Costas & Smith, Bruce D, 1996. "Private Information, Money, and Growth: Indeterminacy, Fluctuations, and the Mundell-Tobin Effect," Journal of Economic Growth, Springer, vol. 1(3), pages 309-332, September.
    5. Lawler, Phillip, 1997. "The Real Balance Effect and the Non-neutrality of Money in a Simple Model of a Small Open Economy," Bulletin of Economic Research, Wiley Blackwell, vol. 49(1), pages 1-15, January.
    6. Dixon,Huw David & Rankin,Neil, 1995. "The New Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521479479.
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