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

  • Ganelli, Giovanni
  • Tervala, Juha

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 to 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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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 3 (September)
Pages: 827-837

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:3:p:827-837
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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