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Oxford Economic Papers Advance Access originally published online on February 16, 2005
Oxford Economic Papers 2005 57(3):522-544; doi:10.1093/oep/gpi017
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Right arrow E12 - Keynes; Keynesian; Post-Keynesian
Right arrow E62 - Fiscal Policy
Right arrow H54 - Infrastructures; Other Public Investment and Capital Stock
Right arrow L16 - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure; Industrial Price Indices
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© Oxford University Press 2005; All rights reserved

Productive public expenditure and imperfect competition with endogenous price markup

Jhy-hwa Chen*, Jhy-yuan Shieh{dagger}, Ching-chong Lai{ddagger}, and Juin-jen Chang

*Department of Economics, Tamkang University, Tamsui, Taipei Hsien 251, Taiwan; e-mail: jhchen{at}mail.tku.edu.tw {dagger}Department of Economics, Chinese Culture University; e-mail: jyshieh{at}faculty.pccu.edu.tw {ddagger}Institute of Economics, Academia Sinica and Department of Economics, National Taiwan University; e-mail: cclai{at}econ.sinica.edu.tw ¶Institute of Economics, Academia Sinica, and Department of Economics, Fu-Jen Catholic University; e-mail: jjchang{at}econ.sinica.edu.tw

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.

Key Words: JEL classification: E12 • E62 • H54


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