Public Infrastructures, Public Consumption and Welfare in a New Open Economy Macro Model

39 Pages Posted: 7 Jul 2009

See all articles by Giovanni Ganelli

Giovanni Ganelli

International Monetary Fund (IMF) - Fiscal Affairs Department

Juha Tervala

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: March 3, 2009

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

JEL Classification: E62, F41, H42, H54

Suggested Citation

Ganelli, Giovanni and Tervala, Juha, Public Infrastructures, Public Consumption and Welfare in a New Open Economy Macro Model (March 3, 2009). Bank of Finland Research Discussion Paper No. 8/2009, Available at SSRN: https://ssrn.com/abstract=1428808 or http://dx.doi.org/10.2139/ssrn.1428808

Giovanni Ganelli

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Juha Tervala (Contact Author)

affiliation not provided to SSRN

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