This paper analyses the impact of public investment on the dynamics of private capital formation in an intertemporal optimising market-clearing framework. The key feature characterising the analysis is that the public good is treated as a durable capital good, subject to congestion. We show how in the presence of congestion the effect of government investment on private capital formation involves a tradeoff between the degree of substitution between private and public capital in production and the degree of congestion. Both lump-sum and distortionary tax ®nancing are considered, with this tradeoff being tightened in the latter case.

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This paper studies the influence of consumption externalities in the Ramsey model. In contrast to the recent literature, a quite general specification of preferences is used and the concept of the effective intertemporal elasticity of substitution is introduced. We give conditions for the observational equivalence between economies with consumption externalities and externality-free economies. An additional key result is that there exist several types of instantaneous utility functions in which the decentralized solution coincides with the socially planned one in spite of the presence of consumption externalities. The conditions for optimal taxation are also derived. ‡ An earlier version of this paper has been presented at the economic theory seminars of the universities of Linz, Magdeburg, and Munich. We thank the participants of these seminars for their useful comments. We are also particularly indebted to two anonymous referees for their very helpful comments and advice. All remaining errors are ours.

In our modified version of the small open economy Ramsey model, we assume that agents have preferences over consumption and status which, in turn, is determined b y relative wealth. This extension potentially eliminates the standard model's counterfactual result that an impatient country over time mortgages all of its capital and labor income. We show that the steady-state values of net assets and consumption, the speed of convergence and, in particular, the direction of adjustment during the transition depend crucially upon the degree of status consciousness. The latter also influences the economy's response to macroeconomic shocks.

In this paper we consider the implications of relative consumption externalities in the Blanchard-Yaari overlapping generations framework. Unlike most of the macroeconomic literature that studies this question, the differences between agents, and, thus, in their relative position, persist in equilibrium. We show in our fixed employment model that consumption externalities lower consumption and the capital stock in long-run equilibrium, a result in sharp contrast to the recent findings of Liu and Turnovsky (2005). In addition, we solve for the intertemporal path of the economy to investigate its response to demographic shocks, specifically, to permanent changes in the birth and death rates.JEL Codes: D91, E21