Dundee Discussion Papers in Economics 106:Effectiveness of fiscal policy in a model of imperfect competition with transactions money

This paper examines the effectiveness of fiscal policy in a general equilibrium macromodel with transactions money and an oligopolistic product market. The results suggest that although money may be neutral and play no direct role as policy instrument, its indirect impact on the effectiveness of fiscal policy can be quite substantial. In particular, (i) fiscal policy becomes ineffective as the weight attached to money is reduced; (ii) the fiscal multiplier becomes negative when the elasticity of substitution between money and leisure exceeds unity; and (iii) it is possible that policy effects are in fact enhanced as the product market becomes more competitive