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

  • Ganelli , Giovanni


    (International Monetary Fund, IMF Institute)

  • Tervala, Juha


    (Bank of Finland Research)

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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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
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
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