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Comment on "Productive Public Expenditure and Imperfect Competition with Endogenous Price Markup"

Costa, Luís and Palma, Nuno (2006): Comment on "Productive Public Expenditure and Imperfect Competition with Endogenous Price Markup".

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Abstract

In this note we show that the claim from Chen et al (2005) that their model generates an endogenous markup is incorrect. This is not only a nomenclature issue: using the �fixed markup which we show to be the only one consistent with the structure of the model implies the main conclusions in that paper do not hold. In particular, government expenditure in infrastructure cannot affect the business cycle in this model by deliberately changing the market structure of the economy.

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