The Timing of Government Spending in a Dynamic Model of Imperfect Competition
Xavier X. Sala-i-Martin
Yale Economic Growth Center Discussion Paper #641, August 1991.
The debate on macroeconomic implications of fiscal policy has
focused on the question of whether the timing of taxes matters
but has neglected the study of the relevance of the timing of
public spending. This paper tries to fill that hole by presenting
a model of dynamic fiscal policy where firms behave non competitively
and households have finite horizons. I show that the existence
of monopoly rents makes the timing of future government spending
relevant. In particular I show that, contrary to the prediction
of most other models of fiscal policy, an anticipated increase
in public spending financed by subsequent tax increases may have
expansionary effects as the positive wealth effect associated
with monopoly rents outweights the negative wealth effect of anticipated
higher taxes. I also show that if the public spending expansion
is financed by subsequent public spending contraction, the experiment
has unambiguous expansionary effects. The model presented can
be thought as a microfounded story of Blanchard's Good-News-Bad-News
model of public policy.
Descriptors Macroeconomic Aspects of Fiscal Policy; Public Expenditures,
Investment, and Finance; Taxation, E620. Fiscal Policies and
Behavior of Economic Agents: Household, H310. Fiscal Policies
and Behavior of Economic Agents: Firm, H320. Taxation and
Subsidies: Efficiency; Optimal Taxation , H210. Microeconomic
Theory--Theory of the Household (Consumer Demand), 0222.
Microeconomics--Theory of Production, 0223. Fiscal Theory;
Empirical Studies Illustrating Fiscal Theory, 3212.