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Comment on "Productive Public Expenditure and Imperfect Competition with Endogenous Price Markup"

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  • Costa, Luís
  • Palma, Nuno

Abstract

In this note we show that the claim from Chen et al (2005) that their model generates an endogenous markup is incorrect. This is not only a nomenclature issue: using the fixed markup which we show to be the only one consistent with the structure of the model implies the main conclusions in that paper do not hold. In particular, government expenditure in infrastructure cannot affect the business cycle in this model by deliberately changing the market structure of the economy.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5143.

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Date of creation: 16 Oct 2006
Date of revision: 08 Jun 2007
Handle: RePEc:pra:mprapa:5143

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Keywords: Endogenous markup;

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References

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  1. 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, vol. 28(2), pages 233-54, May.
  2. Startz, Richard, 1989. "Monopolistic Competition as a Foundation for Keynesian Macroeconomic Models," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 737-52, November.
  3. Luís F. Costa, 2001. "Endogenous Markups and Fiscal Policy," Working Papers 2001/06, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  5. Robert Barro & Silvana Tenreyro, 2001. "Closed and open economy models of business cycles with marked-up and sticky prices," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  6. 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.
  7. Heijdra, Ben J & van der Ploeg, Frederick, 1996. "Keynesian Multipliers and the Cost of Public Funds under Monopolistic Competition," Economic Journal, Royal Economic Society, vol. 106(438), pages 1284-96, September.
  8. Jhy-hwa Chen & Jhy-yuan Shieh & Ching-chong Lai & Juin-jen Chang, 2005. "Productive public expenditure and imperfect competition with endogenous price markup," Oxford Economic Papers, Oxford University Press, vol. 57(3), pages 522-544, July.
  9. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier.
  10. N. Gregory Mankiw, 1989. "Imperfect Competition and the Keynesian Cross," NBER Working Papers 2386, National Bureau of Economic Research, Inc.
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Cited by:
  1. Luís F. Costa & Huw Dixon, 2009. "Fiscal Policy under Imperfect Competition: A Survey," Working Papers 2009/25, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..

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