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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.

Suggested Citation

  • Hassan Molana, 2000. "Effectiveness of Fiscal Policy in a Model of Imperfect Competition With Transactions Money," Australian Economic Papers, Wiley Blackwell, vol. 39(1), pages 56-67, March.
    • Handle: RePEc:bla:ausecp:v:39:y:2000:i:1:p:56-67
    DOI: 10.1111/1467-8454.00074
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