Fiscal Policy, Distortionary Taxation, and Direct Crowding Out under Monopolistic Competition.

A simple macroeconomic model with monopolistic competition on the goods market is developed which displays Keynesian features. The model is used to study the effects of a rise in public spending on national income. The model extends the literature in two directions. First, the authors assume that the government balances its budget by employing distortionary income taxation. Second, they allow for direct crowding out since public consumption enters private utility in a nonseparable fashion. With upward sloping labor supply, an increase in public spending depresses national income, more so in the long run than in the short run. Copyright 1998 by Royal Economic Society.