This paper contrasts the effects of a permanent and temporary investment
tax credit in an open economy. In both cases an ITC will initially stimulate
investment, while reducing employment and output, and generating a current
account deficit. If the ITC is permanent, the accumulation of capital leads to
a higher equilibrium capital stock, higher employment and output, and a
reduction in the economy's stock of net credit. If the ITC is temporary, after
its removal, the economy eventually moves to a new steady-state equilibrium
having a lower permanent capital stock and employment, together with a higher
stock of net credit.
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