Monopolistic Competition, Increasing Returns, and the Effects of Government Spending

JOURNAL OF MONEY, CREDIT, AND BANKING, Vol. 28, No. 2, May 1996

Posted: 22 Apr 1998

See all articles by Michael B. Devereux

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics; Centre for Economic Policy Research (CEPR)

Allen C. Head

Queen's University (Canada)

Beverly J. Lapham

Queen's University

Abstract

The dynamic effects of government spending are considered in a general equilibrium model with monopolistic competition and increasing returns. In the economy, changes in the level of government spending endogenously raise total factor productivity, even though the spending itself is entirely wasteful. This leads to several results which contrast with the effects of government spending policies in environments with constant returns. A permanent increase in government spending increases the steady-state wage and may increase steady-state consumption. Also, regardless of its persistence, a temporary shock to government spending may simultaneously raise output, investment, the real wage, and consumption.

JEL Classification: C68, E6

Suggested Citation

Devereux, Michael B. and Head, Allen C. and Lapham, Beverly J., Monopolistic Competition, Increasing Returns, and the Effects of Government Spending. JOURNAL OF MONEY, CREDIT, AND BANKING, Vol. 28, No. 2, May 1996, Available at SSRN: https://ssrn.com/abstract=3267

Michael B. Devereux (Contact Author)

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada
604-822-2542 (Phone)
604-946-6271 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Allen C. Head

Queen's University (Canada) ( email )

Kingston, Ontario K7L 3N6 K7L 3N6
Canada

Beverly J. Lapham

Queen's University ( email )

Kingston, Ontario K7L 3N6 K7L 3N6
Canada

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