Research Discussion Papers, Bank of Finland
No 8/2009:
Public infrastructures, public consumption and welfare in a new open economy macro model
Giovanni Ganelli ()
and Juha Tervala ()
Abstract: This paper focuses on the trade-off faced by governments
in deciding the allocation of public expenditures between
productivity-enhancing public infrastructures and utility-enhancing public
consumption in a two-country model. The results show that a permanent
increase in the domestic stock of public capital financed by a reduction in
public consumption raises domestic welfare if the productivity of public
capital is high and the weight of public consumption in private utility is
low compared with private consumption. The effect on foreign welfare is
negative in the short run, but positive in the long run. This implies that,
if foreign authorities care not only about the present discounted value of
welfare but also about welfare dynamics, a permanent domestic reallocation
of public spending might result in a virtuous global technological
cycle.
Keywords: public spending composition; welfare; imperfect competition; nominal rigidities; (follow links to similar papers)
JEL-Codes: E62; F41; H42; H54; (follow links to similar papers)
36 pages, March 3, 2009
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