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Should fiscal policy be different in a non-competitive framework?

Authors
Journal
Journal of Monetary Economics
0304-3932
Publisher
Elsevier
Publication Date
Volume
50
Issue
6
Identifiers
DOI: 10.1016/s0304-3932(03)00081-3
Keywords
  • Ramsey Problem
  • Labor Market Imperfections
  • Incomplete Markets
Disciplines
  • Economics
  • Political Science

Abstract

Abstract This paper studies if imperfections in the labor market justify a different fiscal policy. We present a dynamic general equilibrium model with a Ramsey planner deciding about public spending, labor taxes and debt. Two different labor market setups are considered. First we assume a competitive labor market and then we introduce a union with monopoly power. Both models reach the same conclusion as regards to the cyclical properties of the optimal policy: it is not optimal to implement a countercyclical fiscal policy. We also find that government spending should be larger under perfect competition. These main results arise both under complete and incomplete markets for the debt.

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