A joint Initiative of Ludwig-Maximilians-Universität and Ifo Institute for Economic Research Working Papers
PROFITS, MARKUPS AND ENTRY: FISCAL POLICY IN AN OPEN ECONOMY* Javier Coto-Martínez Huw Dixon CESifo Working Paper No. 550
August 2001
CESifo Center for Economic Studies & Ifo Institute for Economic Research Poschingerstr. 5, 81679 Munich, Germany Phone: +49 (89) 9224-1410 - Fax: +49 (89) 9224-1409 e-mail: [email protected] ISSN 1617-9595
An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com ! • from the CESifo website: www.CESifo.de
* An earlier version of this paper appeared as University of York discussion paper 99/19, titles Fiscal Policy in an Imperfectly competitive Dynamic Small Open Economy. This paper has been presented at the ASSET meeting 1998, EEA 1998 meeting (Berlin), the RES meeting 1999 (Nottingham), the 8th World Congress of the Econometric Society 2000 (Seattle) and seminars at The Bank of England, Barcelona (UAB), Copenhagen, Hull, Lisbon (ISEG), Manchester, Oslo, Paris-1 and York. We would like to thank seminar participants for their valuable comments, along with the referees. Special thanks also to Mary Carmen García-Alonso. Huw Dixon wrote this paper whilst an ESRC Research Fellow. Javier Coto would like to acknowledge the financial support from the Spanish government (FPI program), Generalitat de Catalunya and Fundación Caixa Galicia. Faults remain our own. CESifo Working Paper No. 550 August 2001
PROFITS, MARKUPS AND ENTRY: FISCAL POLICY IN AN OPEN ECONOMY
Abstract
In this paper we develop a general model of an imperfectly competitive small open economy. There is a traded and non- traded sector, whose outputs are combined in order to produce a single final good that can be either consumed or invested. We make general assumptions about preferences and technology, and analyze the impact of fiscal policy on the economy. We find that the fiscal multiplier is between zero and one, and provide sufficient conditions for it to be increasing in the degree of imperfect competition. We also are able to compare the multiplier under free-entry and with a fixed number of firms and welfare. A simple graphical representation of the model is developed. Keywords: Imperfect competition, open economy, fiscal policy. JEL Classification: E20, E62, F4.
Javier Coto-Martínez Huw David Dixon Economics Department Economics Department University of East Anglia University of York Norwich, NR4 7TJ YO10 5DD United Kingdom United Kingdom [email protected] 4 Lqwurgxfwlrq
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