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Market Structure and Fiscal Policy Effectiveness
Author(s) -
Molana Hassan,
Zhang Junxi
Publication year - 2001
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00235
Subject(s) - monopolistic competition , economics , fiscal multiplier , market power , market structure , multiplier (economics) , welfare , fiscal policy , macroeconomics , factor market , perfect competition , monetary economics , microeconomics , market economy , monopoly , government spending
In a monopolistic competition macromodel with endogenous market structure, the fiscal multiplier is shown to consist of two components. The first depicts the response of output to a fiscal expansion through the conventional channels that disregard the role of market imperfections. The second component captures the effects of firms' market power as well as the policy‐induced change in market structure. The latter effect—which has not been taken into account in existing studies—is shown to be quite significant in raising the fiscal multiplier (even above unity) and in improving consumers' welfare when the labour market is competitive.