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On the effectiveness of economic policy when competition is imperfect and expectations are rational

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  • Jacobsen, Hans Jorgen
  • Schultz, Christian

Abstract

We study the consequences of imperfect competition in a macro model with only one imperfection; that of labor market competition. Otherwise the model is ‘clean’; agents are optimizers, prices are endogenous, and expectations are rational. We show that, although imperfect competition in itself can explain unemployment (as is well known), it does not in itself give strong support to the use of traditional fiscal policy in fighting unemployment. Fiscal policy will (almost inevitably) have real effects but only through a special effect that may be difficult to control. In many cases fiscal policy cannot create full employment, and it may very well have perverse effects.
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Suggested Citation

  • Jacobsen, Hans Jorgen & Schultz, Christian, 1994. "On the effectiveness of economic policy when competition is imperfect and expectations are rational," European Economic Review, Elsevier, vol. 38(2), pages 305-327, February.
    • Handle: RePEc:eee:eecrev:v:38:y:1994:i:2:p:305-327
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    Cited by:

    1. Kaas, Leo & Madden, Paul, 2005. "Imperfectly competitive cycles with Keynesian and Walrasian features," European Economic Review, Elsevier, vol. 49(4), pages 861-886, May.
    2. repec:ums:papers:2012-10 is not listed on IDEAS
    3. Jorgen Jacobsen, Hans, 2000. "Endogenous, imperfectly competitive business cycles," European Economic Review, Elsevier, vol. 44(2), pages 305-336, February.
    4. Coto-Martinez, Javier, 2006. "Public capital and imperfect competition," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 349-378, January.
    5. Franz, Wolfgang, 1995. "Theoretische Ansätze zur Erklärung der Arbeitslosigkeit: Wo stehen wir 1995?," Discussion Papers 27, University of Konstanz, Center for International Labor Economics (CILE).
    6. Skott Peter & Ryoo Soon, 2014. "Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 533-552, January.
    7. Yasuko Ishiguro, 2019. "The Effects of Macroeconomic Policy with a Disparity in Price Elasticity Between Private‐ and Public‐ Sector Demands," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(5), pages 631-648, November.
    8. Rankin, Neil, 1995. "Money in Hart's model of imperfect competition," European Journal of Political Economy, Elsevier, vol. 11(3), pages 557-575, September.

    More about this item

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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