Intertemporal Preferences, Imperfect Competition and Effective Fiscal Intervention

This paper illustrates that, when good market imperfections cause the equilibrium level of output to be below its corresponding Walrasian level, an exogenous demand stimulus can raise employment and output if households' preferences exhibit some substitution between current leisure and future consumption. The elasticity of substitution is shown to provide a channel for an effective and stable fiscal intervention, enabling the government to formulate a combined tax and borrowing based fiscal policy which can raise the level of output without having any crowding out consequences for the private sector. Copyright 1998 by Blackwell Publishers Ltd and The Victoria University of Manchester