Imperfect capital mobility, public activities, and endogenous growth

Abstract: The creation of a single internal market in an economic integration has greatly increased the international mobility of private capital. In particular, the effects of the increasing integration of capital markets on fiscal and environmental policy are closely related to the inefficient provision of public activities and services. This paper develops an endogenous growth model with public activities and imperfect capital mobility, based on the joint evolution of private capital and natural capital (e.g., environmental quality). It examines the effects of private capital regulation on economic growth and welfare, and also the consequences of policy coordination in a two-country world in which economic growth, environmental regulation, and capital mobility are endogenous. In this economy, there are two types of distortions which can be caused by environmental externalities and international policy competition externalities. In the model, public activities such as productive public investment or the provision of public consumption good are financed by a tax on pollution and a source-based income tax on internationally mobile capital. By comparing the cases in which countries do and do not coordinate their fiscal policies, this paper investigates the relationship between fiscal policy competition and endogenous growth in integrated capital markets or in economic integration (e.g., within the EU or NAFTA