INVESTMENT-PROMOTING POLICIES IN THE PRESENCE OF INTERNATIONAL INTERACTIONS

Investment-promoting policies in a small open economy are analyzed by means of a dynamic applied general equilibrium model with overlapping generations. Simulations of a decrease of the corporate income tax rat e and an increase of the investment tax credit rate are discussed and compared. This paper examines in particular the extent to which intern ational trade and capital hows interfere in both tax policies. The mod eling of overlapping generations allows moreover to identify the winne rs and losers of these reforms. It is shown that the subsidy policy is preferred to the profit tax policy when a small open economy seeks to stimulate capital formation. (C) 1998 Society for Policy Modeling. Pu blished by Elsevier Science Inc.