We investigate the effects of fiscal spending policies in a dynamic general equilibrium economy with monopolistic competition and increasing returns. Government spending shocks generate an endogenous response in aggregate factor productivity leading to a number of results which contrast with the effects of government spending policies in constant returns economies. In particular, government spending multipliers are substantially higher than those in previous literature. Furthermore, government spending shocks can simultaneously raise output, consumption, and investment. Finally, both employment and the real wage may increase in response to a government spending shock.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
894.
Find related papers by JEL classification: E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
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