Composition of Public Expenditure and Short Run Fiscal Multiplier

Existing studies on the fiscal multiplier under imperfect competition assume a symmetric market structure with identical firms. This paper examines the fiscal policy implications of introducing a multisectoral economy where a composite commodity is o¤ered in many varieties within a market of monopolistic competition while a homogeneous good is produced in a perfectly competitive enviroment. Within the context of this mixed industrial structure we show that the sign and the size of the short run multiplier crucially depends on the composition of public expenditure chosen by the government.