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Title:Fiscal policy, entry and capital accumulation: Hump-shaped responses PDF Logo
Authors:Brito, Paulo
Dixon, Huw
Issue Date:2012
Series/Report no.:Cardiff Economics Working Papers E2012/7
Abstract:In this paper we consider the entry and exit of firms in a Ramsey model with capital and an endogenous labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. The costs of entry (exit) are quadratic in the flow of new firms. The number of firms becomes a second state variable and the entry dynamics gives rise to a richer set of dynamics than in the standard case: in particular, there is likely to be a hump shaped response of output to a fiscal shock with maximum impact after impact and before steady-state is reached. Output and capital per firm are also likely to be hump shaped.
Subjects:entry
Ramsey
fiscal policy
macroeconomic dynamics
JEL:E22
D92
E32
D92
Document Type:Working Paper
Appears in Collections:Cardiff Economics Working Papers

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