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Should Fiscal Policy Be Different in a Non-Competitive Framework?

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  • Arantza Gorostiaga

Abstract

This paper aims to study if imperfections in the labor market justify a fiscal policy where public spending, labor income tax rates and debt are set to stabilize output. We present a dynamic general equilibrium model and solve for the optimal policy considering two different labor market setups. First we assume a competitive labor market and then we introduce a union with monopoly power in the labor market. Both models reach the same conclusion as regards the stabilization policy: it is not optimal to use the fiscal policy to stabilize. We also find that government spending should be larger when a competitive labor market is assumed. These main results arise both under complete and incomplete markets for the debt.

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  • Arantza Gorostiaga, 1999. "Should Fiscal Policy Be Different in a Non-Competitive Framework?," Working Papers wp1999_9901, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp1999_9901
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