The effect of public investment on economic growth is a crucial public policy issue. Empirical research into this question was stimulated by Aschauer (1989), who suggested that public capital has a powerful impact on the productivity of private capital. Aschauer's results were controversial and have generated substantial empirical research directed at determining the robustness of his position. The present paper analyses the way in which public investment and fiscal policy influences the performances of economic growth. We analyze the impact of public investment on the dynamics of private capital formation in an intertemporal optimizing framework. Following W.H. Fischer and S.J.Turnovsky (1998), the public good is treated as a durable capital good, subject to congestion. The analysis is made on the basis of a dynamic model with discrete variables. The optimality conditions for the representative agent's problem are deduced on the basis of the Maximum Principle for discrete dynamic systems (Altar, 1976). The production function considered within the model is a function of three variables: labour, stock of private capital and services obtained from the stock of public capital. A critical feature of the model concerns the specification of the productive services derived by the representative agent from public capital. Several variants for this function are analysed in the paper. We also analyse several alternative modes of government financing. A qualitative analysis of the optimal trajectories is performed, on the basis of the information provided by the Maximum Principle, concerning the dynamics of the dual variable and the properties of the Lagrange multipliers. Finally, we analyse the influence of several fiscal and investment decisions on the optimal trajectories and on the performance-function of the model.
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Find related papers by JEL classification: C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis D99 - Microeconomics - - Intertemporal Choice and Growth - - - Other E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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