Fiscal policy, entry and capital accumulation : Hump-shaped responses

Brito, Paulo; Dixon, Huw

http://hdl.handle.net/10400.5/30397

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Authors

Brito, Paulo

Dixon, Huw

Abstract(s)

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 effect after impact and before steady state is reached. Output and capital per firm are also likely to be hump shaped.

Keywords

Entry Ramsey Fiscal Policy Macroeconomic Dynamics

URI

http://hdl.handle.net/10400.5/30397

Citation

Brito, Paulo and Huw Dixon .(2013). “Fiscal policy, entry and capital accumulation : Hump-shaped responses”. Journal of Economic Dynamics and Control, Volume 37, Issue 10: pp. 2123-2155 . (Search PDF in 2024).