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The persistence of government expenditure shocks and the effect of monopolistic competition on the fiscal multiplier

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  • Philipp Harms

Abstract

In this paper, we demonstrate that the influence of monopolistic competition in the product market on an economy's impact response to fiscal shocks depends on the persistence of these shocks. While short-lived increases in lump-sum financed government expenditure have a stronger effect on labor supply if prices are above marginal costs, the response of employment decreases in the markup if shocks are highly persistent. However, we also show that, while the impact response of labor supply to temporary government expenditure shocks may be reduced by monopolistic competition, the fiscal multiplier is always higher if firms have market power. Copyright 2002, Oxford University Press.

Suggested Citation

  • Philipp Harms, 2002. "The persistence of government expenditure shocks and the effect of monopolistic competition on the fiscal multiplier," Oxford Economic Papers, Oxford University Press, vol. 54(1), pages 44-55, January.
  • Handle: RePEc:oup:oxecpp:v:54:y:2002:i:1:p:44-55
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    Cited by:

    1. Javier Andrés & José Emilio Boscá & Javier Ferri, 2011. "Household Leverage and Fiscal Multipliers," Working Papers 1103, International Economics Institute, University of Valencia.
    2. 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.

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