Imperfect competition, the Keynesian cross, and optimal fiscal policy

This note analyzes a simple Keynesian macro model with imperfect competition and demonstrates that the optimal fiscal policy is a complete shutdown-taxes and government purchases should both be zero. If the model is extended slightly, then welfare improving policies may exist. However, the benefits are generated in part by the public goods nature of government purchases, and not just by the multiplier process. It appears that the multiplier alone is not sufficient to justify the use of fiscal policy. (C) 1998 Elsevier Science S.A.