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

Giovanni Ganelli and Juha Tervala

No 8/2009, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: 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.

Keywords: public spending composition; welfare; imperfect competition; nominal rigidities (search for similar items in EconPapers)
JEL-codes: E62 F41 H42 H54 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2009_008

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