Capital mobility, public spending externalities and growth
Economics Bulletin, 2016, vol. 36, issue 1, 22-28
I present a two-country dynamic model where (i) in each country public spending increases firm entry and (ii) capital is internationally mobile. I show that the difference between the aggregate output elasticity with respect to public spending and its firm level counterpart creates a positive cross-border externality in public spending. In contrast with the literature on cross-border spillovers, this externality arises only under fiscal competition between countries and may therefore lead to higher growth rates under strategic policies relative to coordination.
Keywords: two-country model; productive public spending; balanced growth; strategic policies; coordination (search for similar items in EconPapers)
JEL-codes: D9 H4 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ebl:ecbull:eb-15-00745
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