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Fiscal policy, entry and capital accumulation: hump-shaped responses

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In this paper we consider the entry and exit of firms in a Ramsey model with capital and an endogenous labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. The costs of entry (exit) are quadratic in the flow of new firms. The number of firms becomes a second state variable and the entry dynamics gives rise to a richer set of dynamics than in the standard case: in particular, there is likely to be a hump shaped response of output to a fiscal shock with maximum impact after impact and before steady-state is reached. Output and capital per firm are also likely to be hump shaped.

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  • Brito, Paulo & Dixon, Huw David, 2012. "Fiscal policy, entry and capital accumulation: hump-shaped responses," Cardiff Economics Working Papers E2012/7, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2012/7
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    1. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-334, June.
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    Cited by:

    1. Anthony Savagar, 2017. "Firm Dynamics, Dynamic Reallocation, Variable Markups, and Productivity Behaviour," Studies in Economics 1713, School of Economics, University of Kent.
    2. Savagar, Anthony & Dixon, Huw David, 2017. "Firm Entry, Excess Capacity and Aggregate Productivity," Cardiff Economics Working Papers E2017/8, Cardiff University, Cardiff Business School, Economics Section.
    3. Huw Dixon & ANTHONY SAVAGAR, 2017. "The Effect of Firm Entry on Capacity Utilization and Macroeconomic Productivity," 2017 Meeting Papers 1130, Society for Economic Dynamics.

    More about this item

    Keywords

    Entry; Ramsey; fiscal policy; macroeconomic dynamics;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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