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Public infrastructures, public consumption, and welfare in a new-open-economy-macro model

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  • Ganelli, Giovanni
  • Tervala, Juha

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 to 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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 3 (September)
Pages: 827-837

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:3:p:827-837

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Web page: http://www.elsevier.com/locate/inca/622617

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Keywords: Public spending composition Welfare Imperfect competition Nominal rigidities;

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References

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Citations

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Cited by:
  1. Juha Tervala, 2011. "International Welfare Effects of Monetary Policy," Discussion Papers 66, Aboa Centre for Economics.
  2. Gomes, Orlando, 2007. "Deterministic randomness in a model of finance and growth," MPRA Paper 2888, University Library of Munich, Germany.
  3. W. D. Gregori, 2014. "Fiscal Rules and Public Spending: Evidence from Italian Municipalities," Working Papers wp923, Dipartimento Scienze Economiche, Universita' di Bologna.
  4. Juan González Alegre, 2012. "An evaluation of EU regional policy. Do structural actions crowd out public spending?," Public Choice, Springer, vol. 151(1), pages 1-21, April.
  5. Engler, Philipp & Tervala, Juha, 2011. "Beggar-thyself or beggar-thy-neighbour? The welfare effects of monetary policy," Economic Modelling, Elsevier, vol. 28(4), pages 2034-2040, July.
  6. "Shoji, Etsuro" & "Khai, Vu Tuan" & "Takeuchi, Hiroko", 2011. "Fiscal Policy in a New Keynesian Overlapping Generations Model of a Small Open Economy," Economic Review, Hitotsubashi University, vol. 62(1), pages 30-43, January.
  7. Sergio Destefanis & Vania Sena, 2009. "Public capital, productivity and trade balances: some evidence for the Italian regions," Empirical Economics, Springer, vol. 37(3), pages 533-554, December.
  8. Philipp Engler, 2011. "Monetary Policy and Unemployment in Open Economies," NCER Working Paper Series 77, National Centre for Econometric Research.
  9. Viegas, Miguel & Ribeiro, Ana Paula, 2013. "The Dutch experience: Assessing the welfare impacts of two consolidation strategies using a heterogeneous-agent framework," Economic Modelling, Elsevier, vol. 32(C), pages 351-360.

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