The Persistence of Government Expenditure Shocks and the Effect of Monopolistic Competition on the Fiscal Multiplier
Posted: 29 Feb 2008
Date Written: January 2002
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.
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