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Public Investment in a Small Open Economy

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  • Heijdra, B.J.
  • Meijdam, A.C.

    (Tilburg University, Center for Economic Research)

Abstract

We study the effects of public investment in a dynamic overlapping-generations model of a small open economy. Boosting public investment stimulates private capital formation, output, employment, and wages in the long run. The impact effects depend critically on whether public capital is modeled as a stock or as a flow. The welfare benefits are unevenly distributed across generations since capital ownership, and the capital gain induced by the policy shock, rises with age, and because wages rise only gradually under the stock interpretation of public capital. A suitable egalitarian bond policy can be employed to ensure that everybody gains to the same extent. With this additional instrument the intergenerational externality can be neutralized and the resulting efficiency gain coincides with the one obtained in the corresponding representative agent model. A simple modified golden rule for public investment is derived which takes into account the time that is needed to build the public capital stock.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1997-80.

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Date of creation: 1997
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Handle: RePEc:dgr:kubcen:199780

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Related research

Keywords: public investment; intergenerational welfare effects;

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References

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Cited by:
  1. repec:ebl:ecbull:v:3:y:2003:i:28:p:1-16 is not listed on IDEAS
  2. Anthony Bende-Nabende & Jim Slater, 2003. "Private capital formation: Short- and long-run crowding-in (out) effects in ASEAN, 1971-99," Economics Bulletin, AccessEcon, vol. 3(28), pages 1-16.

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