Fiscal Policy Multipliers:The Role of Monopolistic Competition, Scale Economies, and Intertemporal Substitution in Labour Supply

A dynamic macroeconomic model of monopolistic competition is developed for the closed economy. Forward looking consumers demand differentiated goods, supply labour, and save part of their income in the form of shares. Producers manufacture the differentiated goods by using labour and capital. We study the short-run, transition, and long-run effects of fiscal policy. Comparisons with the New Classical case of perfect competition are made. Simple expressions far multipliers are derived. The sensitivity of the multipliers for diversity preference and Ethier productivity effects, intratemporal and intertemporal substitution effects, and markup effects under free and restricted entry are also studied.