Working Paper: CEPR ID: DP280
Authors: Marco Pagano
Abstract: It is often claimed that the demand externality created by imperfectly competitive markets can provide an analytical basis for Keynesian fiscal policy prescriptions. Here this demand externality is embedded in a model where saving and employment are determined by optimizing choices in an imperfectly competitive setting. It turns out that underemployment equilibria do exist, that there is scope for fiscal intervention, but that Keynesian fiscal prescriptions are turned on their head. Demand externalities among imperfectly competitive firms do not in general provide a theoretical basis for these prescriptions, unless supplemented by other deviations from the Walrasian standard in the labor or capital market.
Keywords: imperfect competition; demand externalities; underemployment; multiple equilibria; fiscal policy
JEL Codes: 023; 024; 321
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand externalities (D62) | underemployment equilibria (J64) |
| fiscal policies (H30) | employment levels (J23) |
| fiscal policies (H30) | real wages (J31) |
| fiscal policies (H30) | number of firms (L20) |
| debt-financed increase in public consumption (H69) | employment (J68) |
| balanced-budget reductions (H61) | employment (J68) |
| policy changes (J18) | local or catastrophic effects (H84) |
| initial equilibrium position (D50) | economic outcomes (F61) |
| elasticity of labor supply (J22) | effects of fiscal policy (H30) |