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On the Effectiveness of Economic Policy when Competition is Imperfect and Expectations are Rational

  • Hans Jørgen Jacobsen

    (Institute of Economics, University of Copenhagen)

  • Christian Schultz

    (Institute of Economics, University of Copenhagen)

We study the consequences of imperfect competition in a macro model with only one imperfection; that of labor market competition. Otherwise the model is ‘clean’; agents are optimizers, prices are endogenous, and expectations are rational. We show that, although imperfect competition in itself can explain unemployment (as is well known), it does not in itself give strong support to the use of traditional fiscal policy in fighting unemployment. Fiscal policy will (almost inevitably) have real effects but only through a special effect that may be difficult to control. In many cases fiscal policy cannot create full employment, and it may very well have perverse effects.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 91-16.

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Length: 19 pages
Date of creation: Oct 1991
Date of revision:
Publication status: Published in: European Economic Review, 1994, 38(2) pp 305-327
Handle: RePEc:kud:kuiedp:9116
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