Risk, utility-enhancing government expenditure, and the world economy
Iñaki Erauskin ()
International Finance from University Library of Munich, Germany
This paper analyzes the influence of risk and the expenditure policy of the public sector in a two-country stochastic AK growth model where public spending is utility-enhancing. Having characterized the macroeconomic equilibrium first we study the impact of risk and the public sector on consumption-wealth ratio, growth and welfare, given the exogenous size of the public sector. A higher weight of public consumption in the utility function raises the rate of growth due to a fall in the consumption-wealth ratio. Then we show that consumptionwealth ratio and welfare are higher in an open economy than in a closed economy and we study whether open economies grow more than closed economies. Next, the welfare-maximizing size of the public sector is derived and compared it to the size that maximizes growth. We analyze the impact of exogenous parameters, risk specially, on the optimal size. Then we establish that a higher weight of public consumption in the utility function reduces private consumption-wealth ratio leaving the rate of growth unchanged when the size of the public sector is optimally chosen. Finally, we show that more open economies should have a higher size of the public sector under more general conditions than those established in Turnovsky (1999).
Keywords: risk; utility-enhancing government expenditure; consumption; growth; welfare; optimal size of the public sector (search for similar items in EconPapers)
JEL-codes: F41 F43 (search for similar items in EconPapers)
Pages: 30 pages
Note: Type of Document - pdf; pages: 30
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0412002
Access Statistics for this paper
More papers in International Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ().