زیرساخت های عمومی، مصارف عمومی، و رفاه در مدل جدید اقتصاد باز کلان

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 in a two-country model. The results show that a permanent increase in the domestic stock of public capital financed by a reduction in public consumption raises domestic welfare if the productivity of public capital is high and the weight of public consumption in private utility is low compared to private consumption. The effect on foreign welfare is negative in the short run, but positive in the long run. This implies that, if foreign authorities care not only about the present discounted value of welfare but also about welfare dynamics, a permanent domestic reallocation of public spending might result in a virtuous global technological cycle.

Governments face several trade-offs in the process of planning and executing fiscal policy. For example, decisions on the methods of financing the deficit (or on the use of the surplus) and on the composition of public expenditures need to be made. With regard to the latter issue, governments are involved in the provision of public infrastructures which can increase the productivity of private firms.2 Examples include roads, bridges, airports, and all “… those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain” ( Smith, 1776). At the same time, governments spend large part of their budgets on goods and services that can also be privately provided and, while they do not directly impact the productivity of the private sector, are likely to affect consumers’ utility in a way similar to private consumption. Examples of such utility-enhancing spending for public consumption include (but are obviously not limited to) insurance programs, defense, clean streets, and public parks. This trade-off between productivity-enhancing public investment and utility-enhancing public consumption is often at the forefront of the public debate and policy discussions. Despite being a major policy issue, this trade-off has however received less attention than it deserves in the academic literature. Several authors, particularly since the work of Aschauer (1989) have investigated, both theoretically and empirically, the consequences of productive public spending.3 Very few papers, however, explicitly focus on the trade-off we are interested in. In addition, we are not aware of any paper that analyses the implications of productive public capital in a two-country model featuring at the same time imperfect competition and nominal rigidities. In this paper we fill in this gap, by analyzing the trade-off related to government spending composition in the context of a New Keynesian two-country model belonging to the so-called New Open Economy Macroeconomics (NOEM) framework.4 The only two previous papers which we are aware of explicitly focusing on the trade-off between productive government spending and utility from public consumption are Barro (1990) and Turnovsky and Fisher (1995). In comparing our results to theirs, we find that in our model, contrary to Turnovsky and Fisher (1995), the presence of monopolistic competition and the open economy dimension imply that a shift toward productive government spending is welfare improving even in the short run for plausible parameter values. In our open economy framework, unlike in Turnovsky and Fisher (1995), domestic residents can also increase short-run consumption, and therefore welfare, by running a current account deficit. Our welfare results are therefore more in line with the endogenous growth model presented by Barro (1990)—in which an increase in the share of productive capital in total government spending is welfare-enhancing at all horizons—than with the neoclassical framework used by Turnovsky and Fisher (1995). The open-economy dimension also allows us—unlike Barro (1990) and Turnovsky and Fisher (1995)—to study the impact of a shift in domestic government spending composition on the current account, the exchange rate, and foreign variables. This analysis of how public infrastructures in one country affect another country is important from both the theoretical and empirical point of view.5 More in general, we see our paper as furthering the theoretical analysis of fiscal policy. We see this as important, in view of the renewed interest of policy makers in several countries in the fiscal instrument. In addition, as stressed by Alesina and Perotti (1995), the academic debate on fiscal policy tends to neglect composition issues, which are at the core of our paper. Our analysis shows that a permanent increase in domestic public capital financed by a reduction in public consumption is welfare enhancing for domestic residents, provided that the productivity of public capital is not too low and the weight of public consumption (compared to private consumption) in private utility not too high. However, since a negative net welfare impact cannot be ruled out, one policy implication is that governments should take into account household preferences with respect to public provision of goods and services in deciding the composition of public spending. The implementation of such a policy has a negative short-run impact on foreign utility, because foreign residents have to meet an increased global demand within a relatively underdeveloped (compared to domestic) public infrastructure system. One implication is that, if foreign authorities care about welfare dynamics, they will have an incentive to also increase their level of productive public capital spending in order to avoid short-run welfare losses. A domestic policy shift can therefore result in a virtuous global technological cycle. If the domestic shift in public spending composition is temporary, overall domestic welfare is reduced for low levels of the productivity of public capital, but is increased for high levels. This implies that governments which value the welfare of their citizens should carefully evaluate the impact of planned infrastructure projects on the productivity of the private sector before changing the public spending mix, especially in cases in which the projected increase in productive capital stock is likely to be temporary (due, for example, to uncertainty about securing the necessary fiscal resources to maintain it in the medium and long run). The rest of the paper is organized as follows. Section 2 introduces the model. Section 3 discusses the parameterization. Sections 4 and 5 present and discuss the results for the case of a permanent and of a temporary shift in public spending composition, respectively. Section 6 concludes.

In this paper we focused, in the context of an open-economy model with imperfect competition and nominal rigidities, on the trade-offs faced by governments in deciding the allocation of public spending between productivity-enhancing public infrastructures and utility-enhancing public consumption. Our analysis shows that shifts in the composition of public spending have important positive and welfare implications, both domestically and abroad. In particular, a higher domestic stock of public capital financed by a reduction in public consumption increases domestic welfare if the productivity of public capital is not too low and the importance of public consumption (relative to private consumption) in private utility is not too high. However, since a negative welfare impact cannot be ruled out when the weight of public consumption in private utility is relatively high, one policy implication of our results is that governments should take into account households’ preferences with respect to public provision of services in order to evaluate shifts in the composition of public spending. Similarly, given the importance of changes in α for the welfare results, the impact of planned infrastructure projects on the productivity of the private sector should be evaluated as carefully as possible before changing the public spending mix. With regards to the effect on foreign welfare, a domestic shift in government spending implies a reduction of short-tem foreign utility, while the PDV of foreign welfare is positive, as the benefits of the global expansion in demand are reaped in the medium-long run by the foreign country. If foreign authorities are worried not only about the PDV of utility, but also about welfare dynamics, they will still try to offset the negative short-run welfare effect of the domestic policy. In this case, they will have an incentive to increase the level of foreign productive public capital. In such a situation a domestic policy shift can therefore trigger a virtuous global technological cycle. Given our focus on composition issues, we only look at constant-spending exercises in which changes in the various items of government spending offset each other. In reality, governments might also finance increases in public capital using deficit. Since in the current specification of our model agents live forever, Ricardian equivalence holds. This means that, in the case of a domestic deficit-financed increase in public capital, domestic agents would anticipate that they will have to pay for higher taxes at some point in the future, and this will push them to reduce their private consumption immediately. On the other hand, the higher domestic productivity associated with an expansion in public capital would push domestic private consumption up for the reasons discussed in Section 4.1. Which of the two effects on consumption—and therefore on the exchange rate—would prevail? The answer would depend on relative parameters: if the productivity of public capital was high enough, it would more than offset the impact of anticipated higher taxes, and the results derived in the current paper would still prevail. An interesting extension of our model for future research would be breaking Ricardian equivalence by introducing a positive probability of death in each period. Ganelli (2005) introduces this assumption in a standard NOEM model, finding that a deficit-financed increase in domestic government consumption increases domestic private consumption and appreciates the domestic exchange rate if the deviation from Ricardian equivalence is non-negligible. The intuition is that domestic agents increase their private consumption because they benefit immediately from the stimulation in demand implied by this policy, while they know that, because of the positive probability of death, they might not have to bear the costs of the policy in terms of higher taxation in the future. This suggests that the introduction of deviations from Ricardian equivalence in our model would reinforce the results that we have already derived. In the case of a deficit-financed increase in domestic public capital, domestic private consumption would increase—and the domestic exchange rate would appreciate—due to both the non-Ricardian response to an increase in deficit and the higher productivity entailed by higher public capital. In short, the results would be qualitatively the same (but quantitatively magnified) compared to the ones that we have presented in this paper, with their precise magnitude depending on the productivity of public capital and on the degree of departure from Ricardian equivalence.