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

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...

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Bibliographic Details
Published in:Japanese economic review (Oxford, England) England), 2020-07, Vol.71 (3), p.447-477
Main Authors: Chang, Cheng-wei, Lai, Ching-chong, Lai, Ting-wei
Format: Article
Language:English
Subjects:
Consumption
Development Economics
Econometrics
Economic History
Economics
Economics and Finance
Heterogeneity
Macroeconomics/Monetary Economics//Financial Economics
Microeconomics
Price levels
Social welfare
Stimulus
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Summary: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.
ISSN:1352-4739
1468-5876
DOI:10.1007/s42973-019-00025-8