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

Fiscal Policy, Monopolistic Competition, and Finite Lives

The paper studies the short-run, transitional, and long-run output effects of permanent and temporary shocks in public consumption under various financing methods. To this end, a dynamic macroeconomic model for a closed economy is developed, which features a perfectly competitive final goods sector and a monopolistically competitive intermediate goods sector. Finitely lived households consume final goods, supply labor, and save part of their income. Amongst the findings for a permanent rise in public consumption are: (i) monopolistic competition increases the absolute value of the balanced-budget output multiplier; (ii) positive long-run output multipliers are obtained only if the generational turnover effect is dominated by the intertemporal labor supply effect; (iii) short-run out- put multipliers under lump-sum tax financing are smaller than long-run output multipliers if labor supply is elastic; and (iv) bond financing reduces the size of long-run output multipliers as compared to lump-sum tax financing and may give rise to non-monotonic adjustment paths if labor supply is sufficiently elastic and the speed of adjustment of lump-sum taxes is not too high. Temporary bond-financed fiscal shocks are shown to yield: (i) permanent effects on output; and (ii) negative long-run output multipliers.fiscal policy, output multipliers, Yaari-Blanchard model, overlapping generations, monopolistic competition, love of variety, temporary fiscal shocks

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

The Transitional Dynamics of Fiscal Policy in Small Open Economies

The paper studies the dynamic macroeconomic effects of fiscal shocks of various duration (permanent and temporary) under different financing methods (lump-sum tax and government debt). To this end, we develop an intertemporal macroeconomic model for a small open economy, featuring monopolistic competition in the intermediate goods market, endogenous (intertemporal) labor supply, and finitely lived households. Endogenous labor supply is crucial in generating cyclical adjustment paths and yields faster convergence to the new steady state compared with exogenous labor supply. The quantitative output effects and transitional dynamics of fiscal policy differ substantially from those of an infinitely lived representative agent model. In addition, government debt is key in making the timing of shocks matter, thus yielding permanent output effects of temporary fiscal shocks.fiscal policy, output multipliers, Blanchard-Yaari overlapping generations, monopolistic competition, small open economy

Environmental Policy and the Macroeconomy in the Presence of Ecological Thresholds

We study the environmental and economic effects of public abatement in the presence of multiple stable steady-state ecological equilibria. Under shallow-lake dynamics (SLD), the isocline for the stock of pollution features two stable branches, a good and a bad one. Assuming that the ecology is initially located on the upper (bad) branch of the isocline, the ecological equilibrium is hysteretic and a suitably designed temporary abatement policy can be used to steer the environment from the bad to the good equilibrium. In all models considered in this paper, a “cold turkey” abatement policy is optimal, i.e. the largest feasible shock should be administered for the shortest possible amount of time. Depending on the particular model used to characterize the economic system, there is a capital feedback effect that either helps or hinders the attainment of a successful abatement policy.Shallow-lake dynamics, Bifurcation, Environmental policy, Overlapping generations

The Environmental and Macroeconomic Effects of Socially Responsible Investment

We analyze the effects of socially responsible investment and public abatement on environmental quality and the economy in a continuous-time dynamic growth model featuring optimizing households and firms. Environmental quality is modelled as a renewable resource. Consumers can invest in government bonds or firm equity. Since investors feel partly responsible for environmental pollution when holding firm equity, they require a premium on the return to equity. We show that socially responsible investment behaviour by households partially offsets the positive effects on environmental quality of public abatement policies.socially responsible investment, economic growth, environmental economics, resource dynamics, stock market