Spill-over effects of supply-side changes in a two-country economy with capital accumulation

Abstract

Using a two-country dynamic optimization model with capital accumulation, we explore the effect of such supply-side changes as a rise in productivity and a reduction in the corporate tax rate on the equilibrium path and the welfare of two countries. The welfare effect consists of a tax distortion term and a wealth term. Those supply-side changes in the creditor country increase its welfare but unambiguously decrease the debtor country's welfare, as capital moves from the debtor country to the creditor country.