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Heijdra, Ben J.
Ligthart, Jenny E.
Year of Publication: 
Series/Report no.: 
CESifo Working Paper 1661
The paper studies the short-run, transitional, and long-run output effects of permanent and temporary shocks in public consumption under various financing methods. To this end, a dynamic macroeconomic model for a closed economy is developed, which features a perfectly competitive final goods sector and a monopolistically competitive intermediate goods sector. Finitely lived households consume final goods, supply labor, and save part of their income. Amongst the findings for a permanent rise in public consumption are: (i) monopolistic competition increases the absolute value of the balanced-budget output multiplier; (ii) positive long-run output multipliers are obtained only if the generational turnover effect is dominated by the intertemporal labor supply effect; (iii) short-run out- put multipliers under lump-sum tax financing are smaller than long-run output multipliers if labor supply is elastic; and (iv) bond financing reduces the size of long-run output multipliers as compared to lump-sum tax financing and may give rise to non-monotonic adjustment paths if labor supply is sufficiently elastic and the speed of adjustment of lump-sum taxes is not too high. Temporary bondfinanced fiscal shocks are shown to yield: (i) permanent effects on output; and (ii) negative long-run output multipliers.
fiscal policy
output multipliers
Yaari-Blanchard model
overlapping generations
monopolistic competition
love of variety
Document Type: 
Working Paper

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