Public Infrastructures, Public Consumption, and Welfare in a New-Open-Economy-Macro Model

March 1, 2007

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Giovanni Ganelli, and Juha Tervala. Public Infrastructures, Public Consumption, and Welfare in a New-Open-Economy-Macro Model, (USA: International Monetary Fund, 2007) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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. From the modeling point of view, the paper augments a standard New Open Economy Macroeconomics (NOEM) model by introducing productive public infrastructures. The results show that a temporary increase in the domestic stock of public capital financed by a reduction in public consumption reduces domestic welfare in the short run because the temporary gains from higher productivity do not compensate domestic residents for the utility loss due to lower public consumption. If the policy shift is permanent domestic utility is likely to increase, while foreign residents suffer short-run welfare losses but benefit from welfare gains in the long run. This analysis implies that a permanent domestic reallocation of public spending might result in a virtuous global technological cycle.

Subject: Capital productivity, Consumption, Expenditure, Expenditure composition, Private consumption

Keywords: Domestic policy, Government spending, Money demand, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/067
Stock No:

WPIEA2007067
ISBN:

9781451866315
ISSN:

1018-5941

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