Demand Elasticity and Fiscal Policy

In this paper we study the transmission mechanism of fiscal policy based on possible changes in the elasticity of demand. These are obtained by assuming that firms face a balance of public and private demands, each characterized by di¤erent price elasticity. We show that in this set-up there exists a range of the technological conditions under which fiscal policy is expansionary, independently of the pro- or counter-cyclical nature of its impact on the desired mark-up