Inequality, imperfect competition, and fiscal policy

We build a New Keynesian model with imperfectly competitive goods markets and heterogeneous people and examine their impact on fiscal multipliers and on the net increase in output and expenditure caused by fiscal policies, using the balanced budget multiplier. Results show that in highly unequal economies the maximum net increase in output and expenditure comes when governments increase expenditure and tax high-income workers because the adverse effects on the economy are smaller. However, when inequality decreases and enough people belong to the high-income group governments should fund expenditure by taxing low-income people. Finally, inequality also affects the welfare effects of fiscal policies.