Public Investment in a Small Open Economy

B.J. Heijdra, A.C. Meijdam

Research output: Working paperDiscussion paperOther research output

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages33
Volume1997-80
Publication statusPublished - 1997

Publication series

NameCentER Discussion Paper
Volume1997-80

Fingerprint

Public investment
Public capital
Small open economy
Wages
Ownership
Representative agent
Externalities
Welfare benefits
Distributed generation
Capital stock
Efficiency gains
Capital formation
Overlapping generations model
Golden rule
Capital gains
Boosting

Keywords

  • public investment
  • intergenerational welfare effects

Cite this

Heijdra, B. J., & Meijdam, A. C. (1997). Public Investment in a Small Open Economy. (CentER Discussion Paper; Vol. 1997-80). Tilburg: Macroeconomics.
Heijdra, B.J. ; Meijdam, A.C. / Public Investment in a Small Open Economy. Tilburg : Macroeconomics, 1997. (CentER Discussion Paper).
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Heijdra, BJ & Meijdam, AC 1997 'Public Investment in a Small Open Economy' CentER Discussion Paper, vol. 1997-80, Macroeconomics, Tilburg.

Public Investment in a Small Open Economy. / Heijdra, B.J.; Meijdam, A.C.

Tilburg : Macroeconomics, 1997. (CentER Discussion Paper; Vol. 1997-80).

Research output: Working paperDiscussion paperOther research output

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Heijdra BJ, Meijdam AC. Public Investment in a Small Open Economy. Tilburg: Macroeconomics. 1997. (CentER Discussion Paper).