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

Giovanni Ganelli, Juha Tervala

    Research output: Working paperDiscussion paperScientific

    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.
    Original languageEnglish
    Place of PublicationHelsinki
    PublisherBank of Finland
    Number of pages35
    ISBN (Print)978-952-462-496-1
    ISBN (Electronic)978-952-462-497-8
    Publication statusPublished - 2009
    MoE publication typeD4 Published development or research report or study

    Fields of Science

    • 511 Economics

    Cite this

    Ganelli, G., & Tervala, J. (2009). Public infrastructures, public consumption and welfare in a new open economy macro model. (Bank of Finland Research Discussion Papers; No. 8/2009). Helsinki: Bank of Finland.