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

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  • 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.

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

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Length: 25 pages
Date of creation: 22 Mar 2007
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Handle: RePEc:imf:imfwpa:07/67

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Keywords: Public spending composition ; welfare ; imperfect competition ; nominal rigidities ; Infrastructure ; Government expenditures ; Consumption ; Economic models ;

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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. Philipp Engler, 2011. "Monetary Policy and Unemployment in Open Economies," NCER Working Paper Series 77, National Centre for Econometric Research.
  3. 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.
  4. 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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