Working Paper: CEPR ID: DP205
Authors: Neil Rankin
Abstract: Monetary and fiscal policy are introduced into a version of Hart's "Keynesian features" model of imperfect competition. Individuals' labour supply is exogenous, so, under perfect competition, output is always at the exogenous "full employment" level. Imperfect competition takes the form of Cournot-Nash quantity-setting trade unions, seeking to maximise their members' total wage income. Equilibrium with unemployment is then possible. In this case, fiscal policy (money-financed government spending increases) nearly always affects output, while monetary policy only does so if price expectations are not unit-elastic. Thus in Walrasian equilibrium, not only imperfect competition but also non-neutral money are needed for monetary effectiveness.
Keywords: imperfect competition; monetary policy; fiscal policy; expectations
JEL Codes: 023
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy (E62) | Output (Y10) |
| Monetary policy (E52) | Output (Y10) |
| Non-neutrality of money (E49) | Monetary policy effectiveness (E52) |
| Price expectations (not unit-elastic) (D11) | Monetary policy effectiveness (E52) |
| Imperfect competition (L13) | Monetary policy effectiveness (E52) |