Deficit Financing Strategies and the Fiscal Multiplier

  • H. Molana
Conference paper


A significant proportion of the recent literature on various macroeconomic policy issues bases the analysis on models which possess precise microeconomic foundations. This is mainly motivated by the ability of such models to allow for the structure of preferences, technologies and market imperfections to be taken into account explicitly (see the reference list for a sample of studies within this category). These studies usually assume that the economy consists of three types of agents: households who consume, save and supply labour; firms which demand labour and supply a homogeneous consumption good; and a government which has real expenditure plans financed by taxation, borrowing and/or issuing money. The typical model assumes that the three agents described above engage in transactions in four markets: goods, labour, money and bonds (the last two issued by the government). The corresponding demand and supply equations are derived from some optimising behaviour and a general equilibrium model is constructed by setting demand equal to the corresponding supply and taking account of the relevant budget constraints which imply some adding up restrictions. The model is then solved to determine the endogenous variables in terms of the exogenous ones and the solution is used to obtain some policy implications regarding, for instance, the effect of a fiscal expansion. This paper looks at the structure of such general equilibrium models and argues that the effect of a fiscal expansion is sensitive to the way the model is set up.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Auerbach, A. J. and Kotlikoff, L. J. (1987) Dynamic fiscal policy, Cambridge University Press.Google Scholar
  2. Blanchard, O. J. and Kiyotaki, N. (1987) ‘Monopolistic competition and the effects of aggregate demand’, American Economic Review, 77, 647–66.Google Scholar
  3. Dixon, H. (1987) ‘A simple model of imperfect competition with Walrasian features’, Oxford Economic Papers, 39, 134–60.Google Scholar
  4. Frenkel, J. A. and Razin, A. (1987) Fiscal policies and the world economy, MIT Press, Cambridge, Massachusetts.Google Scholar
  5. Hart, O. (1982) ‘A model of imperfect competition with Keynesian features’ Quarterly Journal of Economics, 97, 109–38.CrossRefGoogle Scholar
  6. Mankiw, N. G. (1988) ‘Imperfect competition and the Keynesian Cross’ Economics Letters, 26, 7–13.CrossRefGoogle Scholar
  7. Molana, H. and Moutos, T. (1991) ‘A note on taxation, imperfect competition and the balanced budget multiplier’ Oxford Economic Papers, 43, 68–74.Google Scholar
  8. Molana, H. and Moutos, T. (1992) ‘Returns to scale, imperfect competition, and aggregate demand and trade policy effects in a two-country model’ Open Economies Review, forthcoming.Google Scholar
  9. Rankin, N. (1986) ‘Debt policy under fixed and flexible prices’, Oxford Economic Papers, 38, 481–500.Google Scholar
  10. Startz, R. (1989) ‘Monopolistic competition as a foundation for Keynesian macroeconomic models’ Quarterly Journal of Economics, 104, 737–52.CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 1993

Authors and Affiliations

  • H. Molana
    • 1
  1. 1.Department of Economics and ManagementUniversity of DundeeDundeeScotland, UK

Personalised recommendations