Promoting Investment under International Capital Mobility: An Intertemporal General Equilibrium Analysis
This paper uses a dynamic computable general equilibrium model to compare, in an economy open to international capital flows, the effects of two U.S. policies intended to promote domestic capital formation. The two policies -- the introduction of an investment tax credit (ITC) and a reduction in the statutory corporate income tax rate -- differ in their treatment of old (existing) and new capital. The model features adjustment dynamics, intertemporal optimization by U.S. and foreign households and firms endowed with model-consistent expectations, imperfect substitution between domestic and foreign assets in portfolios, an integrated treatment of the current and capital accounts of the balance of payments, and industry disaggregation in the United States. We find that the two policies (scaled to imply the same revenue cost) differ in their consequences for foreign and domestic welfare, the balance of payments accounts, international competitiveness, and U.S. industrial structure. The ITC produces larger domestic welfare gains because it is more effective in reducing intertemporal distortions, while the two policies have similar implications for intersectoral efficiency. From the point of view of domestic welfare, the relative attractiveness of the ITC is enhanced when international capital mobility is taken into account, a reflection of international transfers of wealth associated with foreign ownership of part of the U.S. capital stock. Whereas reducing the corporate tax rate improves the trade balance initially, introducing the ITC causes a deterioration of the trade balance in the short run. Reflecting a lower real exchange rate, export-oriented sectors perform better relative to non-tradable industries under a lower corporate tax rate than in the presence of the lTC, especially in the short run.
|Date of creation:||Oct 1989|
|Publication status:||published as Bovenberg, A Lans & Goulder, Lawrence H, 1993. " Promoting Investment under International Capital Mobility: An Intertemporal General Equilibrium Analysis," Scandinavian Journal of Economics, Blackwell Publishing, vol. 95(2), pages 133-56.|
|Note:||ITI PE IFM|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
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.:
- Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
- Fair, Ray C & Taylor, John B, 1983.
"Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models,"
Econometric Society, vol. 51(4), pages 1169-1185, July.
- Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear RationalExpectations Models," NBER Technical Working Papers 0005, National Bureau of Economic Research, Inc.
- Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
- James M. Poterba & Lawrence H. Summers, 1984.
"The Economic Effects of Dividend Taxation,"
NBER Working Papers
1353, National Bureau of Economic Research, Inc.
- James M. Poterba & Julio J. Rotemberg, 1986.
"Money in the Utility Function: An Empirical Implementation,"
NBER Working Papers
1796, National Bureau of Economic Research, Inc.
- James M. Poterba & Julio J. Rotemberg, 1986. "Money in the Utility Function: An Empirical Implementation," Working papers 408, Massachusetts Institute of Technology (MIT), Department of Economics.
- Robert C. Feenstra, 1989. "Trade Policies for International Competitiveness," NBER Books, National Bureau of Economic Research, Inc, number feen89-1.
- Duffie, Darrell & Zame, William, 1989.
"The Consumption-Based Capital Asset Pricing Model,"
Econometric Society, vol. 57(6), pages 1279-1297, November.
- Roger H. Gordon & James R. Hines Jr. & Lawrence H. Summers, 1986.
"Notes on the Tax Treatment of Structures,"
NBER Working Papers
1896, National Bureau of Economic Research, Inc.
- Bovenberg, A Lans, 1989. "The Effects of Capital Income Taxation on International Competitiveness and Trade Flows," American Economic Review, American Economic Association, vol. 79(5), pages 1045-1064, December.
- Jorgenson, Dale W & Yun, Kun-Young, 1986. " The Efficiency of Capital Allocation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 85-107.
- Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-984, June.
- Mussa, Michael, 1978. "Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 775-791, October.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3139. 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: ()
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.