Should Fiscal Policy Be Different in a Non-Competitive Framework?

• Arantza Gorostiaga ^[1]
  1. [1] Centro de Estudios Monetarios y Financieros

     Centro de Estudios Monetarios y Financieros

     Madrid, España

     
• Localización: Documentos de Trabajo ( CEMFI ), Nº. 1 (Working Paper No. 9901, January 1999), 1999
• Idioma: inglés
• Enlaces
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• Resumen

  • This paper aims to study if imperfections in the labor market justify a fiscal policy where public spending, labor income tax rates and debt are set to stabilize output. We present a dynamic general equilibrium model and solve for the optimal policy considering two different labor market setups. First we assume a competitive labor market and then we introduce a union with monopoly power in the labor market. Both models reach the same conclusion as regards the stabilization policy: it is not optimal to use the fiscal policy to stabilize. We also find that government spending should be larger when a competitive labor market is assumed. These main results arise both under complete and incomplete markets for the debt.