Public Investment Criteria in Overlapping Generations Models of Open Economies |
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Authors: | David F Burgess |
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Institution: | (1) Department of Economics, University of Western Ontario, London, Ontario, N6A 5C2, Canada |
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Abstract: | This paper derives criteria for worthwhile public investment in an overlapping generations model of an “almost small” open
economy- an economy with access to external funding at a given interest rate, but with some influence over its temporal terms of trade. If the economy is dynamically efficient (i.e. the interest rate exceeds the growth rate), committed to free
trade, public investment is debt financed and lump sum taxes are feasible, two results follow. First, the “social opportunity
cost of public funds” will exceed the government's borrowing rate because of the adverse effect of government borrowing on
the terms of trade. Second, the marginal rate of return on worthwhile public investment will be greater than the social opportunity
cost of public funds if public and private investment are complements (substitutes) and the tax on capital is below (above)
the rate that minimizes the steady state burden of servicing the debt.
JEL Code: F21, H43 |
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Keywords: | public investment criteria open economies |
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