Fiscal Stimulus and Endogenous Firm Entry in a Monopolistic Competition Macroeconomic Model

Abstract

This paper sets up a monopolistic competition model featuring the returns to production specialization. Some novel results are derived from the analysis. First, the effect of a fiscal stimulus on consumption may be positive or negative, depending crucially upon whether the production function is characterized by increasing or decreasing returns to production specialization. Second, following a fiscal expansion, increasing returns to specialization lead to a positive linkage between real wages and aggregate output, while decreasing returns to specialization result in a negative relationship between real wages and aggregate output. Third, a fiscal expansion may raise social welfare, provided that the degree of increasing returns to production specialization is sufficiently large.

Industrial structure and economic performance: The role of productive public expenditure

“…In addition, its value can be as high as 0.6, while it can also be as low as being negative. See, for example, Chang, Lai, and Chang ().…”