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On the Effectiveness of Economic Policy when Competition is Imperfect and Expectations are Rational

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Author Info

  • Hans Jørgen Jacobsen

    (Institute of Economics, University of Copenhagen)

  • Christian Schultz

    (Institute of Economics, University of Copenhagen)

Abstract

We study the consequences of imperfect competition in a macro model with only one imperfection; that of labor market competition. Otherwise the model is ‘clean’; agents are optimizers, prices are endogenous, and expectations are rational. We show that, although imperfect competition in itself can explain unemployment (as is well known), it does not in itself give strong support to the use of traditional fiscal policy in fighting unemployment. Fiscal policy will (almost inevitably) have real effects but only through a special effect that may be difficult to control. In many cases fiscal policy cannot create full employment, and it may very well have perverse effects.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 91-16.

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Length: 19 pages
Date of creation: Oct 1991
Date of revision:
Publication status: Published in: European Economic Review, 1994, 38(2) pp 305-327
Handle: RePEc:kud:kuiedp:9116

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Keywords: fiscal theory; stabilization theories and policies;

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Cited by:
  1. Coto-Martinez, Javier, 2006. "Public capital and imperfect competition," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 349-378, January.
  2. L Kaas & P Madden, 2002. "Imperfectly Competitive Cycles with Keynesian and Walrasian Features," The School of Economics Discussion Paper Series 0211, Economics, The University of Manchester.
  3. Laurence Lasselle & Serge Svizzero, 1999. "Entry and Unemployment in a Union-Oligopoly Model," CRIEFF Discussion Papers 9904, Centre for Research into Industry, Enterprise, Finance and the Firm.
  4. Jorgen Jacobsen, Hans, 2000. "Endogenous, imperfectly competitive business cycles," European Economic Review, Elsevier, vol. 44(2), pages 305-336, February.
  5. Laurence Lasselle & Serge Svizzero, 2000. "Imperfectly Competitive Business Cycles With Underemployment," CRIEFF Discussion Papers 0011, Centre for Research into Industry, Enterprise, Finance and the Firm.
  6. Peter Skott & Soon Ryoo, 2012. "Public Debt and Functional Finance in an OLG Model with Imperfect Competition," UMASS Amherst Economics Working Papers 2012-10, University of Massachusetts Amherst, Department of Economics.

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