In this paper, we demonstrate that the influence of monopolistic competition in the product market on an economy's impact response to fiscal shocks depends on the persistence o these shocks. While short-lived increases in lump-sum financed govern- ment expenditure have a stronger effect on labor supply if prices are above marginal costs, the response of employment decreases in the markup if shocks are highly per- sistent. However, we also show that, while the impact response of labor supply to temporary government expenditure shocks may be reduced by monopolistic competi- tion, The fiscal multiplier is always higher if firms have market power.
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