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Macroeconomics with Endogenous Markups and Optimal Taxation

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  • Federico Etro

Abstract

We augment a flexible price dynamic general equilibrium model with any symmetric intratemporal preferences over a variety of goods supplied under monopolistic, Bertrand or Cournot competition to derive implications for business cycle and market inefficiencies. Endogenous markups can magnify the impact of shocks on consumption and labor supply through intertemporal substitution mechanisms, and the optimal fiscal policy requires a variable labor income subsidy and a capital income tax that converges to zero in the long run. With an endogenous number of goods and strategic interactions, also entry affects markups and the optimal fiscal policy requires also a tax on profits. We characterize equilibrium and efficient market structures and derive optimal tax rules for a variety of preferences, including a new type of general additive preferences that nest direct, indirect, implicit and homothetic additivity

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  • Federico Etro, 2018. "Macroeconomics with Endogenous Markups and Optimal Taxation," Working Papers - Economics wp2018_25.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:frz:wpaper:wp2018_25.rdf
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    Cited by:

    1. Etro, Federico, 2020. "Technological Foundations for Dynamic Models with Endogenous Entry," European Economic Review, Elsevier, vol. 128(C).
    2. Savagar, Anthony & Dixon, Huw, 2020. "Firm entry, excess capacity and endogenous productivity," European Economic Review, Elsevier, vol. 121(C).
    3. Cavallari, Lilia, 2022. "The international real business cycle when demand matters," Journal of Macroeconomics, Elsevier, vol. 73(C).
    4. Paolo Bertoletti & Federico Etro, 2022. "Monopolistic competition, as you like it," Economic Inquiry, Western Economic Association International, vol. 60(1), pages 293-319, January.
    5. Etro, Federico, 2019. "The Romer model with monopolistic competition and general technologies," Economics Letters, Elsevier, vol. 181(C), pages 1-6.
    6. Cavallari, Lilia & Etro, Federico, 2020. "Demand, markups and the business cycle," European Economic Review, Elsevier, vol. 127(C).
    7. 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.
    8. Kushnir, Alexey & Tarasov, Alexander & Zubrickas, Robertas, 2021. "On equilibrium in monopolistic competition with endogenous labor," Economics Letters, Elsevier, vol. 201(C).
    9. Eren Gürer, 2022. "Rising markups and optimal redistributive taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(5), pages 1227-1259, October.
    10. Etro, Federico, 2023. "Technologies for endogenous growth," Journal of Mathematical Economics, Elsevier, vol. 105(C).
    11. Alexander Tarasov & Robertas Zubrickas, 2021. "Optimal Income Taxation under Monopolistic Competition," CESifo Working Paper Series 9309, CESifo.
    12. Alexander Tarasov & Robertas Zubrickas, 2023. "Optimal income taxation under monopolistic competition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(2), pages 495-523, August.
    13. Lilia Cavallari & Federico Etro, 2017. "Demand, Markups and the Business Cycle. Bayesian Estimation and Quantitative Analysis in Closed and Open Economies," Working Papers 2017:09, Department of Economics, University of Venice "Ca' Foscari".
    14. Gilad Sorek, 2024. "Schumpeterian Growth with Variable Demand Elasticity," Auburn Economics Working Paper Series auwp2024-04, Department of Economics, Auburn University.

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    More about this item

    Keywords

    Business cycles; Monopolistic competition; Optimal taxation; variable markups.;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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