A Relook at Output-Reducing Government Expenditure
21 Pages Posted: 1 Aug 2013 Last revised: 10 Jun 2014
Date Written: July 29, 2013
Perceived wisdom typically corroborates ‘useful’ Keynesian-type of public spending to be welfare-improving if output (or GDP) increases, i.e. a positive fiscal multiplier. I show a contrarian result which suggests that welfare can increase despite a fall in output due to fiscal expenditure. The conditions which drive this outcome are the production of differentiated products under increasing returns to scale and spare labour capacity in the economy.
Keywords: Negative multiplier, lump-sum and employment subsidies, labour supply, income tax, monopolistic competition
JEL Classification: E62, H2, J2
Suggested Citation: Suggested Citation