Public Investment in a Small Open Economy

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.public investment;intergenerational welfare effects

Environmental Abatement and Intergenerational Distribution

This paper employs an overlapping generations model to explore the impact of public abatement on private investment and the intergenerational distribution of welfare. Whereas public abatement benefits old generations in terms of non-environmental welfare, future generations gain most in terms of environmental welfare. The overall benefits tend to be smallest for generations born at the time of the unanticipated policy shock. Public debt policy, however, can be employed to ensure that welfare gains are distributed more equally across the various generations. Such a policy implies that natural capital crowds out man-made capital.overlapping generations;public environmental abatement;intergenerational welfare effects;debt policy

Labor Tax Reform and Equilibrium Unemployment: A Search and Matching Approach

The paper studies simple strategies of labor tax reform in a search and matching model of the labor market featuring endogenous labor supply.Changing the composition of the tax wedge|that is, reducing a payroll tax and increasing a progressive wage tax such that the marginal tax wedge remains unaffected|increases employment, reduces the equilibrium unemployment rate, and increases public revenue as long as workers do not have all the bargaining power in wage negotiations.A strategy of replacing employment taxes by payroll taxes increases employment and reduces the equilibrium unemployment rate, while the effect on public revenue is ambiguous.labour market;taxation;unemployment;matching

Environmental Quality, the Macroeconomy and Intergenerational Distribution

environment;macroeconomics;distribution;environmental tax;national debt

Output Dynamics, Technology, and Public Investment

The paper studies the dynamic output effects of public infrastructure investment in a small open economy. We develop an overlapping generations model that includes a production externality of public capital and a wealth effect on labor supply. Public capital enters the firm's production function under various technological scenarios. We show that if factors of production are gross complements and public capital is Solow neutral, which is the empirically plausible case, the long-run output multiplier falls short of its Hicks-neutral value. The way in which public capital augments factor productivity crucially affects the dynamics of private capital and net foreign assets, but yields qualitatively similar output dynamics. In contrast to conventional results obtained from hysteretic models, we find non-monotonic output dynamics of a public investment impulse in the non-hysteretic model. Schmitt-Grohe and Uribe's (2003) finding of identical impulse responses across the two model types is thus not robust to the inclusion of spillovers of public capital.Infrastructure capital;public investment;fiscal policy;output multipliers;transitional dynamics;technology