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

Brito, Paulo and Dixon, Huw David ORCID: 2013. Fiscal policy, entry and capital accumulation: Hump-shaped responses. Journal of Economic Dynamics and Control 37 (10) , pp. 2123-2155. 10.1016/j.jedc.2013.03.005

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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.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Uncontrolled Keywords: Entry; Ramsey; Fiscal policy; Macroeconomic dynamics
Publisher: Elsevier
ISSN: 0165-1889
Last Modified: 25 Oct 2022 09:14

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