Imperfect competition and the fiscal multiplier

The impact of fiscal policy in an economy with a monopolistic output market but perfectly competitive labour market is examined both in the short run (with a fixed number of firms), and in the long run with free entry. The main innovation of the paper is the generality of the assumptions about preferences and technology, which enable us to examine the robustness of the relationship between the degree of monopoly and the fiscal multiplier found by Startz (1989), Mankiw (1988) and Dixon (1987). The specific results of these papers are found to rest on two assumptions: constant returns and Cobb-Douglas preferences.