On public investment, long-run growth, and the real exchange rate

This paper extends the Barro (1990) endogenous growth model with productive government services to a two-country world with perfect capital mobility, populated by optimising agents with uncertain lifetimes. It shows that increases in government spending on infrastructure for the home country result in higher growth rates and a terms of trade improvement. Both these effects are reversed after a point, showing that a hump-shaped curve--similar to the Barro curve, but with different properties--can be obtained here even with lump-sum taxes. We also examine the welfare implications of public investment policies, and characterise the world economy's dynamics. Copyright 2002, Oxford University Press.