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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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