DP205 | Monetary and Fiscal Policy in a `Hartian' Model of Imperfect Competition

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01/11/1987

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Abstract

Monetary and fiscal policy are introduced into a version of Hart's "Keynesian features" model of imperfect competition. Individuals' labour supply is exogenous, so, under perfect competition, output is always at the exogenous "full employment" level. Imperfect competition takes the form of Cournot-Nash quantity-setting trade unions, seeking to maximise their members' total wage income. Equilibrium with unemployment is then possible. In this case, fiscal policy (money-financed government spending increases) nearly always affects output, while monetary policy only does so if price expectations are not unit-elastic. Thus in Walrasian equilibrium, not only imperfect competition but also non-neutral money are needed for monetary effectiveness.