Should fiscal policy be different in a non-competitive framework?

This paper studies if imperfections in the labor market justify a different fiscal policy. We present a dynamic general equilibrium model with a Ramsey planner deciding about public spending, labor taxes and debt. Two different labor market setups are considered. First we assume a competitive labor...

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Bibliographic Details
Published in:Journal of monetary economics 2003-09, Vol.50 (6), p.1311-1331
Main Author: Gorostiaga, Arantza
Format: Article
Language:English
Subjects:
Competition
Economic models
Economics
Finance
Fiscal policy
General economic equilibrium
Incomplete markets
Labor market
Labor market imperfections
Labour market
Market
Monetary economics
Ramsey problem
Studies
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Summary:This paper studies if imperfections in the labor market justify a different fiscal policy. We present a dynamic general equilibrium model with a Ramsey planner deciding about public spending, labor taxes and debt. Two different labor market setups are considered. First we assume a competitive labor market and then we introduce a union with monopoly power. Both models reach the same conclusion as regards to the cyclical properties of the optimal policy: it is not optimal to implement a countercyclical fiscal policy. We also find that government spending should be larger under perfect competition. These main results arise both under complete and incomplete markets for the debt.
ISSN:0304-3932
1873-1295
DOI:10.1016/S0304-3932(03)00081-3