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Fiscal policy in an optimizing model with finite lives and endogenous labour supply

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Summary

In this paper the impact of balanced budget, money-financed and bond-financed fiscal policy is analyzed, in the short run as well as in the long run. The analysis is based on an optimizing model of a closed economy that displays perfect foresight of agents and sticky wages and prices. Consumers have finite planning horizons modeled according to the Blanchard-Yaari framework. Labour supply is endogenized by including leisure in the utility function. Labour scarcity is also allowed for. The results are illustrated by numerical simulation experiments.

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Abbreviations

A :

financial wealth

B :

stock of bonds

c :

actual consumption

c d :

demand for consumption goods

c s :

supply of consumption goods

D :

dividend

E :

equity

F :

government budget deficit

g :

government expenditures

H :

human wealth

i :

actual investment (excluding installation costs)

i d :

demand for investment goods (excluding installation costs)

j :

actual investment

j d :

demand for investment goods

j s :

supply of investment goods

k :

capital stock

l :

actual employment

l d :

notional demand for labour

l k :

Keynesian demand for labour

l s :

supply of labour

M :

money stock

P l :

nominal wage

P y :

price

q :

Tobin'sq

R :

nominal interest rate

T :

lump-sum tax

u :

instantaneous utility

U :

lifetime utility

W :

total wealth

y :

actual production

y d :

demand for goods

y l :

labour constrained supply of goods

y s :

notional supply of goods

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Authors and Affiliations

  1. Institute of Economics, University of Nijmegen, Nijmegen, The Netherlands

    Lex Meijdam

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  1. Lex Meijdam
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Meijdam, L. Fiscal policy in an optimizing model with finite lives and endogenous labour supply. De Economist 138, 146–167 (1990). https://doi.org/10.1007/BF01329988

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