KEYNESIAN MULTIPLIERS AND THE COST OF PUBLIC FUNDS UNDER MONOPOLISTICCOMPETITION

We extend macroeconomic models of imperfect competition with Keynesian features to allow for non-unitary elasticities between leisure and co nsumption and the effect of product variety on multipliers and welfare . Provided preference For diversity is sufficiently strong, the real n ational income multiplier for a given rise in real public spending is larger under free than under restricted entry and exit of firms. This implies a pro-cyclical real consumer wage. With lump-sum taxes the mar ginal cost of public funds is below unity. Optimal public spending may be counter-cyclical. More priority for public goods raises the long-r un cost of public funds.