IMPERFECT COMPETITION, UNDEREMPLOYMENT EQUILIBRIA AND FISCAL-POLICY

The model presented here belongs to the demand spillover variety, it builds upon the spatial analysis of monopolistic competition proposed by Salop and adds two novel features to the Weitzman-Solow framework: it treats explicitly both the consumption-saving decisions and the labour supply choices of households. In this model, that blends the reciprocal externality among imperfectly competitive firms with a competitve model of the capital and labour market, one obtains a complete reversal of the Keynesian prescriptions for a depressed economy. On one hand, this highlights the importance of fully specifying the model of the macroeconomy before drawing policy conclusions about underemployment equilibria. On the other hand, it suggests that demand externalities due to imperfect competition, though capable of producing underemployment results, do not appear per se to hold great promise as foundation for Keynesian-type fiscal policy actions. -from Author