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Investment Tax Credit in an Open Economy

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  • Partha Sen
  • Stephen J. Turnovsky

Abstract

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.

Suggested Citation

  • Partha Sen & Stephen J. Turnovsky, 1990. "Investment Tax Credit in an Open Economy," NBER Working Papers 3298, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3298
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    1. Francesco Giavazzi & Charles Wyplosz, 1984. "The Real Exchange Rate, the Current Account, and the Speed of Adjustment," NBER Chapters,in: Exchange Rate Theory and Practice, pages 335-356 National Bureau of Economic Research, Inc.
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    3. 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.
    4. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977 Elsevier.
    5. Abel, Andrew B & Blanchard, Olivier J, 1983. "An Intertemporal Model of Saving and Investment," Econometrica, Econometric Society, vol. 51(3), pages 675-692, May.
    6. Willem H. Buiter, 1984. "Fiscal policy in open, interdependent economies," NBER Working Papers 1429, National Bureau of Economic Research, Inc.
    7. 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.
    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. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
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