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Optimal fiscal policy under monopolistic competition with firm heterogeneity

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  • Cheng‐wei Chang

Abstract

Government spending is a policy instrument used to sustain economic development and improve social welfare. Empirical observations, however, reveal a significant decrease in the government spending to GDP ratio for the United States. In addition, the United States has been observed to exhibit a rise in firm heterogeneity in productivity in recent decades. This paper shows that the optimal size of government expenditure will decrease as firm heterogeneity increases. We thus indicate that the rise in firm heterogeneity in productivity may serve as a plausible vehicle to explain the decline in the share of government spending in GDP for the United States.

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  • Cheng‐wei Chang, 2023. "Optimal fiscal policy under monopolistic competition with firm heterogeneity," Scottish Journal of Political Economy, Scottish Economic Society, vol. 70(5), pages 423-438, November.
    • Handle: RePEc:bla:scotjp:v:70:y:2023:i:5:p:423-438
    DOI: 10.1111/sjpe.12363
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    References listed on IDEAS

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