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Should fiscal policy be different in a non-competitive framework?

  • Gorostiaga, Arantza

This paper aims to study if imperfections in the labor market justify a fiscal policy where public spending, labor income tax rates and debt are set to stabilize output. We present a dynamic general equilibrium model and solve for the optimal policy considering two different labor market setups. First we assume a competitive labor market and then we introduce a union with monopoly power in the labor market. Both models reach the same conclusion as regards the stabilization policy: it is not optimal to use the fiscal policy to stabilize. We also find that government spending should be larger when a competitive labor market is assumed. These main results arise both under complete and incomplete markets for the debt.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 50 (2003)
Issue (Month): 6 (September)
Pages: 1311-1331

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Handle: RePEc:eee:moneco:v:50:y:2003:i:6:p:1311-1331
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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