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Effectiveness of Fiscal Policy in a Model of Imperfect Competition With Transactions Money
Author(s) -
Molana Hassan
Publication year - 2000
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.00074
Subject(s) - economics , fiscal policy , imperfect competition , monetary economics , elasticity of substitution , oligopoly , monetary policy , general equilibrium theory , fiscal multiplier , microeconomics , macroeconomics , welfare , production (economics) , market economy , government spending , cournot competition
This paper examines the effectiveness of fiscal policy in a general equilibrium macromodel with transactions money and an oligopolistic product market. The results suggest that although money may be neutral and play no direct role as a policy instrument, its indirect impact on the effectiveness of fiscal policy can be quite substantial. In particular, when money balances feature as a choice variable in the households' objective function, (i) fiscal policy becomes ineffective as the weight attached to money is reduced; (ii) the fiscal multiplier becomes negative when the elasticity of substitution between money and leisure exceeds unity; and (iii) it is possible that policy effects are in fact enhanced as the product market becomes more competitive.