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Public Infrastructures, Public Consumption, and Welfare in a New-Open-Economy-Macro Model
Author:
Mr. Giovanni Ganelli
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and
Juha Tervalanull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2007: Issue 067
Language:
English
Publication Date:
01 Mar 2007
DOI:
https://doi.org/10.5089/9781451866315.001
ISBN:
9781451866315
ISSN:
1018-5941
Pages:
25
Keywords:
WP; government spending; domestic policy; money demand
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2007: Issue 067