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Fiscal stimulus in a simple macroeconomic model of monopolistic competition with firm heterogeneity

Author

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  • Cheng-wei Chang

    (Tunghai University)

  • Ching-chong Lai

    (Institute of Economics, Academia Sinica
    National Chengchi University
    Institute of Economics, National Sun Yat-Sen University
    Feng Chia University)

  • Ting-wei Lai

    (National Chengchi University)

Abstract

This paper studies the impact of a fiscal stimulus by setting up a simple monopolistic competition model with firm heterogeneity in productivity. Several main results are derived from the general equilibrium analysis. First, a rise in firm heterogeneity per se leads to decreases in aggregate output and aggregate consumption, but raises the aggregate price level when the variety-enhancing effect is sufficiently strong. Second, a fiscal expansion will bring about a positive effect on aggregate consumption, provided that the variety-enhancing effect is relatively strong or the extent of firm heterogeneity is relatively small. Finally, a fiscal expansion may raise social welfare, depending on the size of the variety-enhancing effect and the extent of firm heterogeneity.

Suggested Citation

  • Cheng-wei Chang & Ching-chong Lai & Ting-wei Lai, 2020. "Fiscal stimulus in a simple macroeconomic model of monopolistic competition with firm heterogeneity," The Japanese Economic Review, Springer, vol. 71(3), pages 447-477, July.
    • Handle: RePEc:spr:jecrev:v:71:y:2020:i:3:d:10.1007_s42973-019-00025-8
    DOI: 10.1007/s42973-019-00025-8
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    Cited by:

    1. Cheng-wei Chang & Ching-chong Lai, 2021. "Optimal fiscal policies and market structures with monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1385-1411, December.
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    More about this item

    Keywords

    Monopolistic competition; Firm heterogeneity; Fiscal policy;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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