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Fiscal Policy Multipliers: The Role of Monopolistic Competition, Scale Economies, and Intertemporal Substitution in Labour Supply


  • Heijdra, Ben J


A dynamic macroeconomic model of monopolistic competition is developed for the closed economy. Forward looking consumers demand differentiated goods, supply labor, and save part of their income in the form of shares. Producers manufacture the differentiated goods by using labor and capital. The author studies the short-run, transition, and long-run effects of fiscal policy. Comparisons with the New Classical case of perfect competition are made. Simple expressions for multipliers are derived. The sensitivity of the multipliers for diversity preference and Ethier productivity effects, intratemporal and intertemporal substitution effects, and markup effects under free and restricted entry are also studied. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Heijdra, Ben J, 1998. "Fiscal Policy Multipliers: The Role of Monopolistic Competition, Scale Economies, and Intertemporal Substitution in Labour Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 659-696, August.
  • Handle: RePEc:ier:iecrev:v:39:y:1998:i:3:p:659-96

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    References listed on IDEAS

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    Cited by:

    1. Leon Bettendorf & Ben Heijdra, 2001. "Intergenerational and International Welfare Leakages of a Product Subsidy in a Small Open Economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(5), pages 705-729, November.
    2. Luis F Costa & Huw D Dixon, "undated". "A Simple Business-Cycle Model with Schumpeterian Features," Discussion Papers 05/30, Department of Economics, University of York.
    3. Dominik Grafenhofer & Christian Jaag & Christian Keuschnigg & Mirela Keuschnigg, 2005. "Probabilistic Aging," University of St. Gallen Department of Economics working paper series 2005 2005-08, Department of Economics, University of St. Gallen.
    4. Coto-Martinez, Javier & Dixon, Huw, 2003. "Profits, markups and entry: fiscal policy in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 573-597, February.
    5. Dominik Grafenhofer & Christian Jaag & Christian Keuschnigg & Mirela Keuschnigg, 2007. "Economic ageing and demographic change," Vienna Yearbook of Population Research, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna, vol. 5(1), pages 133-165.
    6. Partha Sen, 2009. "Fixed Costs, The Balanced Budget Multiplier And Welfare," The Japanese Economic Review, Japanese Economic Association, vol. 60(3), pages 395-404.
    7. Peter Claeys & Luis Costa, 2012. "“A Note on the Relationship Between the Cyclicality of Markups and Fiscal Policy”," AQR Working Papers 201208, University of Barcelona, Regional Quantitative Analysis Group, revised Sep 2012.
    8. Ligthart, J.E. & van der Meijden, G.C., 2011. "The Dynamics of Revenue-Neutral Trade Liberalization," Discussion Paper 2011-142, Tilburg University, Center for Economic Research.
    9. Heijdra, Ben J. & Ligthart, Jenny E., 2010. "The Transitional Dynamics Of Fiscal Policy In Small Open Economies," Macroeconomic Dynamics, Cambridge University Press, vol. 14(01), pages 1-28, February.
    10. Christian Jaag, 2005. "The Role of Endogenous Skill Choice in an Aging Economy," Public Economics 0505005, EconWPA.
    11. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
    12. Luís F. Costa & Huw Dixon, 2009. "Fiscal Policy under Imperfect Competition: A Survey," Working Papers Department of Economics 2009/25, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    13. Ken-Ichi Hirose & Shinsuke Ikeda, 2004. "Decreasing Marginal Impatience in a Monetary Growth Model," ISER Discussion Paper 0622, Institute of Social and Economic Research, Osaka University.
    14. Javier Coto-Martinez & Huw Dixon, "undated". "Fiscal Policy in an Imperfectly Competitive Dynamic Small Open Economy," Discussion Papers 99/19, Department of Economics, University of York.
    15. Christian Keuschnigg, 2001. "Business Formation and Aggregate Investment," German Economic Review, Verein für Socialpolitik, vol. 2(1), pages 31-55, February.
    16. Nick Draper & Alex Armstrong, 2007. "GAMMA; a simulation model for ageing, pensions and public finances," CPB Document 147, CPB Netherlands Bureau for Economic Policy Analysis.
    17. Coto-Martinez, Javier, 2006. "Public capital and imperfect competition," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 349-378, January.
    18. Leon Bettendorf & Ben Heijdra, 2001. "Intergenerational welfare effects of a tariff under monopolistic competition," Journal of Economics, Springer, vol. 73(3), pages 313-346, October.
    19. Luís Costa, 2007. "GDP steady-state multipliers under monopolistic competition revisited," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 6(3), pages 181-204, December.
    20. Huw David Dixon, 2000. "Modelling Market Power in Labour and Product Markets in a Dynamic Economy," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 4(2), pages 104-121, Winter.
    21. Partha Sen, 2005. "Perfect Competition and the Keynesian Cross:Revisiting Tobin," Working papers 135, Centre for Development Economics, Delhi School of Economics.
    22. Emmanuelle Taugourdeau, 2002. "Imperfect Competition and Fiscal Policy Transmission in a Two-Country Economy," Open Economies Review, Springer, vol. 13(1), pages 47-71, January.
    23. Paulo Brito & Huw Dixon, 2009. "Entry and the accumulation of capital: A two state variable extension to the Ramsey model," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(4), pages 333-357.

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