ON THE EFFECTIVENESS OF ECONOMIC-POLICY WHEN COMPETITION IS IMPERFECTAND EXPECTATIONS ARE RATIONAL

We study the consequences of imperfect competition in a macro model wi th only one imperfection; that of labor market competition. Otherwise the model is 'clean'; agents are optimizers, prices are endogenous, an d expectations are rational. We show that, although imperfect competit ion in itself can explain unemployment (as is well known), it does not in itself give strong support to the use of traditional fiscal policy in fighting unemployment. Fiscal policy will (almost inevitably) have real effects but only through a special effect that may be difficult to control. In many cases fiscal policy cannot create full employment, and it may very well have perverse effects.