Public investment and intergenerational distribution

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, and wages in the long run. The impact effects depend critically on whether public capital is modelled as a stock or as a flow. The welfare benefits are unevenly distributed across generations because capital ownership rises with age and wages rise only gradually (under the stock interpretation). A suitable egalitarian bond policy ensures that everybody gains to the same extent. A simple modified golden rule for public investment is derived. (C) 2002 Elsevier Science B.V. All rights reserved.