In a monopolistic competition macromodel with endogenous market structure,
the fiscal multiplier is shown to consist of two components. The first depi
cts the response of output to a fiscal expansion through the conventional c
hannels that disregard the role of market imperfections. The second compone
nt captures the effects of firms' market power as well as the policy-induce
d change in market structure. The latter effect-which has not been taken in
to account in existing studies-is shown to be quite significant in raising
the fiscal multiplier (even above unity) and in improving consumers' welfar
e when the labour market is competitive.