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Public Investment in a Small Open Economy
Heijdra,B.J. Meijdam,A.C.
Heijdra,B.J.
Meijdam,A.C.
Abstract
We study the effects of public investment in a dynamic overlapping-generations model of a small open economy. Boosting public investment stimulates private capital formation, output, employment, and wages in the long run. The impact effects depend critically on whether public capital is modeled as a stock or as a flow. The welfare benefits are unevenly distributed across generations since capital ownership, and the capital gain induced by the policy shock, rises with age, and because wages rise only gradually under the stock interpretation of public capital. A suitable egalitarian bond policy can be employed to ensure that everybody gains to the same extent. With this additional instrument the intergenerational externality can be neutralized and the resulting efficiency gain coincides with the one obtained in the corresponding representative agent model. A simple modified golden rule for public investment is derived which takes into account the time that is needed to build the public capital stock.
Description
Pagination: 33
Date
1997
Journal Title
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Volume Title
Publisher
Macroeconomics
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80.pdf
Adobe PDF, 218.21 KB
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Keywords
public investment, intergenerational welfare effects, D62 - Externalities, E62 - Fiscal Policy ; Modern Monetary Theory, F41 - Open Economy Macroeconomics, H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies, H54 - Infrastructures ; Other Public Investment and Capital Stock, SDG 8 - Decent Work and Economic Growth, SDG 9 - Industry, Innovation, and Infrastructure, SDG 15 - Life on Land, SDG 17 - Partnerships for the Goals
Citation
Heijdra, B J & Meijdam, A C 1997 'Public Investment in a Small Open Economy' CentER Discussion Paper, vol. 1997-80, Macroeconomics, Tilburg.