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

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Author Info

  • Ganelli , Giovanni

    ()
    (International Monetary Fund, IMF Institute)

  • Tervala, Juha

    ()
    (Bank of Finland Research)

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.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 8/2009.

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Length: 36 pages
Date of creation: 03 Mar 2009
Date of revision:
Handle: RePEc:hhs:bofrdp:2009_008

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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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. Gomes, Orlando, 2007. "Deterministic randomness in a model of finance and growth," MPRA Paper 2888, University Library of Munich, Germany.
  2. "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.
  3. 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.
  4. 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.
  5. Engler, Philipp, 2011. "Monetary policy and unemployment in open economies," Discussion Papers 2011/24, Free University Berlin, School of Business & Economics.
  6. 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.
  7. W. D. Gregori, 2014. "Fiscal Rules and Public Spending: Evidence from Italian Municipalities," Working Papers wp923, Dipartimento Scienze Economiche, Universita' di Bologna.
  8. Tervala, Juha, 2012. "International welfare effects of monetary policy," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 356-376.
  9. 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.

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