Essays on Endogenous Product Creation and Market (De)regulation

This thesis examines fiscal policy in a dynamic stochastic general equilibrium (DSGE) model and the effects of market (de)regulation. Chapter 1 summarizes the thesis. Chapters 2 and 3 investigate different aspects of fiscal policy in a DSGE model with endogenous producer entry and labour market frictions. Chapters 2 studies optimum product diversity and optimal fiscal policy. I find that marginal cost pricing is optimal when market regulation is absent. However, in the presence of regulation, there are efficiency trade-offs from using fiscal instruments to eliminate one or more distortions which exist in the competitive equilibrium. Chapter 3 investigates the macroeconomic effects of fiscal shocks in economies with high and low regulation, respectively. I find that an expansion in government spending reduces product creation and is recessionary. In addition, a positive shock to labour and capital income tax rates, respectively, also generates recessionary effects due to the dynamics of entry, investment and labour market conditions. Chapter 4 examines the macroeconomic and welfare effects of market deregulation in the context of optimized unemployment benefits. Results show that benefit optimization does not generate significant overall welfare gains following deregulation. However, following labour market deregulation, an optimized path of unemployment benefits generates positive short run welfare in contrast to the non-optimized status quo. Chapter 5 empirically examines the macroeconomic effects of deregulation and interactions between regulation and reform. Results show that reducing entry barriers and employment protection, respectively, negatively affects consumption in the short run. Evidence also suggests that product market deregulation leads to a larger rise in unemployment in the short run when unemployment benefits are high.