Intertemporal Preferences, Imperfect Competition and Effective Fiscal Intervention

Abstract

This paper illustrates that, when goods market imperfections cause the equilibrium level of output to be below its corresponding Walrasian level, an exogenous demand stimulus can raise employment and output if households’ preferences exhibit some substitution between current leisure and future consumption. The elasticity of substitution is shown to provide a channel for an effective and stable fiscal intervention, enabling the government to formulate a combined tax‐ and borrowing‐based fiscal policy which can raise the level of output without having any crowding‐out consequences for the private sector.

Fiscal Policy under Imperfect Competition with Flexible Prices: An Overview and Survey

“…increasing returns from diversity in the investmentgoods sector). Costa (2007) (the effect of capital depreciation), Devereux et al (1996) (increasing returns to specialisation), Harms (2002) (persistency of scal shocks), Heijdra et al (1998) (distortionary taxation and useful public expenditure), Linneman and Schabert (2003) (price stickiness and scal-monetary policies interaction), Molana (1998) (intertemporal substitution between current leisure and future consumption), or Ravn et al (2006) (endogenous mark-ups due to deep habits) are also examples if important references in this line of research. We can also observe a recent revival of interest in the effects of scal policy in imperfectly competitive economies with sticky prices where complementarity between private consumption and leisure may generate consumption crowding in -see Bilbiie (2011) -and additionally the zero lower bound for the interest rate provides increased effectiveness -see Christiano et al (2009) andHall (2009).…”

Fiscal Policy Under Imperfect Competition: A Survey

“…increasing returns from diversity in the investment goods sector). Costa (2007) (the e¤ect of capital depreciation), Devereux et al (1996) (increasing returns to specialisation), Harms (2002) (persistency of …scal shocks), Heijdra et al (1998) (distortionary taxation and useful public expenditure), Linneman and Schabert (2003) (price stickiness and …scal-monetary policies interaction), Molana (1998) (intertemporal substitution between current leisure and future consumption), or Ravn et al (2006) (endogenous markups due to deep habits) are also examples if important references in this line of research.…”