Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

Author Info

  • Giovanni Ganelli
  • Juha Tervala

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. From the modeling point of view, the paper augments a standard New Open Economy Macroeconomics (NOEM) model by introducing productive public infrastructures. The results show that a temporary increase in the domestic stock of public capital financed by a reduction in public consumption reduces domestic welfare in the short run because the temporary gains from higher productivity do not compensate domestic residents for the utility loss due to lower public consumption. If the policy shift is permanent domestic utility is likely to increase, while foreign residents suffer short-run welfare losses but benefit from welfare gains in the long run. This analysis implies that a permanent domestic reallocation of public spending might result in a virtuous global technological cycle.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=20571
Download Restriction: no

Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/67.

as in new window
Length: 25
Date of creation: 01 Mar 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/67

Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Email:
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC

Order Information:
Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

Related research

Keywords: Welfare; Infrastructure; Government expenditures; Economic models; government spending; public spending; open economy; fiscal policy; domestic economy; imperfect competition; budget constraint; domestic firms; composition of public spending; current account deficit; domestic consumption; domestic goods; political economy; terms of trade; fiscal affairs department; endogenous growth; aggregate demand; fiscal resources; open economies; nominal interest rate; public expenditures; competitive advantage; fiscal affairs; elasticity of substitution; fiscal shock; public finances; domestic prices; current account surplus; government expenditure; unit of labor; government budget; increase in consumption; fiscal adjustment; fiscal issues; world economy; fiscal policy coordination; fiscal instrument; public finance; fiscal activities; composition of government expenditure; domestic demand; public expenditure; capital expenditure; fiscal stance; market integration; exchange rate regimes; government budget constraint; fiscal expansions; price stability; transmission of shocks; world demand; trade ? effect; factor price; closed economies; net welfare impact; fiscal stabilization;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, Elsevier, vol. 54(2), pages 235-266, August.
  2. Rioja, Felix K., 1999. "Productiveness and welfare implications of public infrastructure: a dynamic two-sector general equilibrium analysis," Journal of Development Economics, Elsevier, Elsevier, vol. 58(2), pages 387-404, April.
  3. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(2), pages 421-445, May.
  4. Clarida, Richard & Findlay, Ronald, 1994. "After Maastricht: Public Investment, Economic Integration and International Capital Mobility," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 61(243), pages 319-29, August.
  5. Christian Pierdzioch, 2003. "Capital Mobility and the Effectiveness of Fiscal Policy in Open Economies," Kiel Working Papers 1164, Kiel Institute for the World Economy.
  6. Devereux, Michael B. & Engel, Charles & Storgaard, Peter E., 2004. "Endogenous exchange rate pass-through when nominal prices are set in advance," Journal of International Economics, Elsevier, Elsevier, vol. 63(2), pages 263-291, July.
  7. Sala-I-Martin, X. & Barro, R.J., 1991. "Public Finance in Models of Economic Growth," Papers, Yale - Economic Growth Center 640, Yale - Economic Growth Center.
  8. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 24(10), pages 1405-1423, September.
  9. Coto-Martinez, Javier, 2006. "Public capital and imperfect competition," Journal of Public Economics, Elsevier, Elsevier, vol. 90(1-2), pages 349-378, January.
  10. Duggal, Vijaya G. & Saltzman, Cynthia & Klein, Lawrence R., 2007. "Infrastructure and productivity: An extension to private infrastructure and it productivity," Journal of Econometrics, Elsevier, Elsevier, vol. 140(2), pages 485-502, October.
  11. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  12. Michael B. Devereux & Charles Engel, 2002. "Exchange Rate Pass-Through, Exchange Rate Volatility, and Exchange Rate Disconnect," NBER Working Papers 8858, National Bureau of Economic Research, Inc.
  13. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  14. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  15. Sutherland, Alan, 1996. " Financial Market Integration and Macroeconomic Volatility," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 98(4), pages 521-39, December.
  16. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, Elsevier, vol. 50(1), pages 117-153, February.
  17. Fabio Ghironi, 2000. "Macroeconomic Interdependence under Incomplete Markets," Boston College Working Papers in Economics, Boston College Department of Economics 471, Boston College Department of Economics, revised 07 Feb 2003.
  18. Maurice J. Roche, 1996. "Government Spending and the International Business Cycle," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 29(4), pages 865-84, November.
  19. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 23(2), pages 177-200, March.
  20. Sutherland, Alan, 2005. "Incomplete pass-through and the welfare effects of exchange rate variability," Journal of International Economics, Elsevier, Elsevier, vol. 65(2), pages 375-399, March.
  21. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 637-58, September.
  22. David Owyong & Shandre Thangavelu, 2001. "An empirical study on public capital spillovers from the USA to Canada," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 33(11), pages 1493-1499.
  23. Philip R. Lane & Roberto Perotti, 2001. "The Importance of Composition of Fiscal Policy: Evidence from Different Exchange Rate Regimes," CEG Working Papers, Trinity College Dublin, Department of Economics 200111, Trinity College Dublin, Department of Economics.
  24. Leonor Coutinho, 2005. "Fiscal Policy in the New Open Economy Macroeconomics and Prospects for Fiscal Policy Coordination," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 19(5), pages 789-822, December.
  25. Ganelli, Giovanni & Lane, Philip R., 2002. "Dynamic General Equilibrium Analysis: The Open Economy Dimension," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3540, C.E.P.R. Discussion Papers.
  26. Robert Kollmann, 2002. "Monetary policy rules in the open economy: effects of welfare and business cycles," ULB Institutional Repository 2013/7628, ULB -- Universite Libre de Bruxelles.
  27. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt6412m5b7, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  28. Bergin, Paul R., 2003. "Putting the 'New Open Economy Macroeconomics' to a test," Journal of International Economics, Elsevier, Elsevier, vol. 60(1), pages 3-34, May.
  29. Ganelli, Giovanni, 2005. "The new open economy macroeconomics of government debt," Journal of International Economics, Elsevier, Elsevier, vol. 65(1), pages 167-184, January.
  30. Rioja, Felix K., 2003. "Filling potholes: macroeconomic effects of maintenance versus new investments in public infrastructure," Journal of Public Economics, Elsevier, Elsevier, vol. 87(9-10), pages 2281-2304, September.
  31. Kalaitzidakis, Pantelis & Kalyvitis, Sarantis, 2004. "On the macroeconomic implications of maintenance in public capital," Journal of Public Economics, Elsevier, Elsevier, vol. 88(3-4), pages 695-712, March.
  32. Turnovsky, Stephen J. & Fisher, Walter H., 1995. "The composition of government expenditure and its consequences for macroeconomic performance," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 19(4), pages 747-786, May.
  33. Giancarlo Corsetti, 2007. "New Open Economy Macroeconomics," RSCAS Working Papers, European University Institute 2007/27, European University Institute.
  34. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 315-34, June.
  35. Betts, Caroline & Devereux, Michael B., 2000. "Erratum to "Exchange rate dynamics in a model of pricing-to-market": [Journal of International Economics 50 (2000) 214-244]," Journal of International Economics, Elsevier, Elsevier, vol. 52(1), pages 207-208, October.
  36. Alfredo Pereira & Jorge Andraz, 2004. "Public highway spending and state spillovers in the USA," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(12), pages 785-788.
  37. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, Elsevier, vol. 50(1), pages 215-244, February.
  38. Tille, Cedric, 2001. "The role of consumption substitutability in the international transmission of monetary shocks," Journal of International Economics, Elsevier, Elsevier, vol. 53(2), pages 421-444, April.
  39. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  40. Ludger Linnemann & Andreas Schabert, 2006. "Productive Government Expenditure In Monetary Business Cycle Models," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 53(1), pages 28-46, 02.
  41. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  42. Milesi-Ferretti, Gian Maria & Moriyama, Kenji, 2006. "Fiscal adjustment in EU countries: A balance sheet approach," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(12), pages 3281-3298, December.
  43. Hau, Harald, 2000. "Exchange rate determination: The role of factor price rigidities and nontradeables," Journal of International Economics, Elsevier, Elsevier, vol. 50(2), pages 421-447, April.
  44. Finn, Mary G, 1998. "Cyclical Effects of Government's Employment and Goods Purchases," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 635-57, August.
  45. Feltenstein, Andrew & Morris, Stephen, 1990. "Fiscal stabilization and exchange rate instability : A theoretical approach and some policy conclusions using Mexican data," Journal of Public Economics, Elsevier, Elsevier, vol. 42(3), pages 329-356, August.
  46. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(4), pages 743-764, October.
  47. Lucio Sarno, 2001. "Toward a new paradigm in open economy modeling: where do we stand?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 21-36.
  48. repec:fth:coluec:754 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Juha Tervala, 2011. "International Welfare Effects of Monetary Policy," Discussion Papers, Aboa Centre for Economics 66, Aboa Centre for Economics.
  2. Engler, Philipp, 2011. "Monetary policy and unemployment in open economies," Discussion Papers 2011/24, Free University Berlin, School of Business & Economics.
  3. Gomes, Orlando, 2007. "Deterministic randomness in a model of finance and growth," MPRA Paper 2888, University Library of Munich, Germany.
  4. Tervala, Juha & Engler, Philipp, 2010. "Beggar-thyself or beggar-thy-neighbour? The welfare effects of monetary policy," Discussion Papers 2010/6, Free University Berlin, School of Business & Economics.
  5. Sergio Destefanis & Vania Sena, 2009. "Public capital, productivity and trade balances: some evidence for the Italian regions," Empirical Economics, Springer, Springer, vol. 37(3), pages 533-554, December.
  6. W. D. Gregori, 2014. "Fiscal Rules and Public Spending: Evidence from Italian Municipalities," Working Papers wp923, Dipartimento Scienze Economiche, Universita' di Bologna.
  7. 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, Elsevier, vol. 32(C), pages 351-360.
  8. "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, Hitotsubashi University, vol. 62(1), pages 30-43, January.
  9. Miguel Viegas & Ana Ribeiro, 2014. "The Economic Adjustment Program for Portugal: assessing welfare impact in a heterogeneous-agent framework," Portuguese Economic Journal, Springer, Springer, vol. 13(1), pages 53-70, April.
  10. Juan González Alegre, 2012. "An evaluation of EU regional policy. Do structural actions crowd out public spending?," Public Choice, Springer, Springer, vol. 151(1), pages 1-21, April.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:07/67. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.