Environmental Resources, Public Inputs and Fiscal Constraints

Abstract

We study the consequences of a binding constraint on the level of public expenditures directed at sustaining an environmental resource, which enters as a public input (alongside capital) into the economy-wide production function. As expected, the long run stock of that resource is reduced; however, we also find that the long run capital stock is reduced in a larger proportion. Also, the capital-environmental resource ratio becomes sensitive to changes in the rate of interest.