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Investment Tax Credit in an Open Economy

  • Partha Sen
  • Stephen J. Turnovsky

This paper contrasts the effects of a permanent and temporary investment tax credit in an open economy. In both cases an ITC will initially stimulate investment, while reducing employment and output, and generating a current account deficit. If the ITC is permanent, the accumulation of capital leads to a higher equilibrium capital stock, higher employment and output, and a reduction in the economy's stock of net credit. If the ITC is temporary, after its removal, the economy eventually moves to a new steady-state equilibrium having a lower permanent capital stock and employment, together with a higher stock of net credit.

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File URL: http://www.nber.org/papers/w3298.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3298.

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Date of creation: Mar 1990
Date of revision:
Publication status: published as Journal of Public Economics, Vol. 42, No. 3, pp. 277-299, (August 1990).
Handle: RePEc:nbr:nberwo:3298
Note: ITI IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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  1. Obstfeld, Maurice, 1989. "Fiscal deficits and relative prices in a growing world economy," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 461-484, May.
  2. Willem H. Buiter, 1984. "Fiscal policy in open, interdependent economies," NBER Working Papers 1429, National Bureau of Economic Research, Inc.
  3. Sen, Partha & Turnovsky, Stephen J., 1989. "Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect," Journal of International Economics, Elsevier, vol. 26(3-4), pages 227-250, May.
  4. Andrew B. Abel & Olivier J. Blanchard, 1982. "An Intertemporal Model of Saving and Investment," NBER Working Papers 0885, National Bureau of Economic Research, Inc.
  5. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
  6. Francesco Giavazzi & Wyplosz, . "The Real Exchange Rate, the Current Account and the Speed of Adjustment," Rodney L. White Center for Financial Research Working Papers 13-82, Wharton School Rodney L. White Center for Financial Research.
  7. Buiter, Willem H., 1984. "Policy Evaluation and Design for Continuous Time Linear Rational Expectations Models: Some Recent Developments," CEPR Discussion Papers 15, C.E.P.R. Discussion Papers.
  8. Abel, Andrew B., 1982. "Dynamic effects of permanent and temporary tax policies in a q model of investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 353-373.
  9. Maurice Obstfeld & Alan C. Stockman, 1983. "Exchange-Rate Dynamics," NBER Working Papers 1230, National Bureau of Economic Research, Inc.
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