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In this paper we examine the international transmission of environmental policy using a New Keynesian model of the global economy. We first consider the case in which the quality of the environment affects utility, but not productivity. This allows us to look at the trade-off between environmental quality and output. We then consider the case in which the quality of the environment increases productivity but does not affect utility. Our main results show that in both cases a unilateral implementation of a more stringent environmental policy by the domestic country raises foreign welfare under a benchmark parameterization. However, since this policy can have a negative impact on domestic utility but a positive one on world utility, an international coordination problem can arise in the implementation of environmental policy: no country will have an incentive to implement environmental reforms if there is a possibility that its trading partners will do so.

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 with 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.

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 with 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.

Cover Page -- Title Page -- Copyright Page -- I. Introduction -- II. Inclusive Growth: Multiple Definitions -- III. Inclusiveness in Japan: Trends and Stylized Facts -- IV. Data and Empirical Strategy -- V. Results -- VI. Policy Implications -- VII. Conclusions -- Footnotes