Productive public expenditure and imperfect competition with endogenous price markup

Abstract

This paper incorporates the productivity role of government expenditure into the imperfectly competitive macroeconomic model and re-examines the important findings on the fiscal multiplier proposed by Dixon (1987) , Mankiw (1988) , and Startz (1989) . Generally speaking, we find that the classical results of imperfect competition models should be modified when the productivity role of government expenditure is taken into account. The short-run fiscal multiplier may be positive or negative, depending crucially upon whether the public infrastructure and the private input are technical substitutes or complements for each other. The short-run fiscal multiplier does not necessarily exceed the corresponding long-run multiplier. If public expenditure and private inputs are technically substitutes, the long-run fiscal multiplier may exceed the short-run fiscal multiplier. Additionally, in the long-term analysis, the dynamics of entry is investigated. In response to a change in government policy, the novel transitions of output and entry provide us with important policy implications.