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Public investment in a small open economy

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Author Info
Heijdra, B.J.
Meijdam, L. (Tilburg University, Center for Economic Research)

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

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

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Find related papers by JEL classification:
D62 - Microeconomics - - Welfare Economics - - - Externalities
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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  3. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March. [Downloadable!] (restricted)
    Other versions:
  4. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June. [Downloadable!] (restricted)
  5. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November. [Downloadable!] (restricted)
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  7. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-96, September. [Downloadable!] (restricted)
  8. Turnovsky, Stephen J., 1996. "Optimal tax, debt, and expenditure policies in a growing economy," Journal of Public Economics, Elsevier, vol. 60(1), pages 21-44, April. [Downloadable!] (restricted)
  9. Uzawa, H, 1969. "Time Preference and the Penrose Effect in a Two-Class Model of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 628-52, Part II, . [Downloadable!] (restricted)
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  13. Aschauer, David Alan & Greenwood, Jeremy, 1985. "Macroeconomic effects of fiscal policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 23(1), pages 91-138, January. [Downloadable!] (restricted)
  14. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October. [Downloadable!] (restricted)
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  15. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December. [Downloadable!] (restricted)
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  16. David Alan Aschauer, 1990. "Why is infrastructure important?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 21-68. [Downloadable!]
  17. Aschauer, David Alan, 1988. "The Equilibrium Approach to Fiscal Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 41-62, February. [Downloadable!] (restricted)
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  18. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January. [Downloadable!] (restricted)
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  1. Anthony Bende-Nabende & Jim Slater, 2003. "Private capital formation: Short- and long-run crowding-in (out) effects in ASEAN, 1971-99," Economics Bulletin, Economics Bulletin, vol. 3(28), pages 1-16. [Downloadable!]
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