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Public investment: a remedy or a curse? Examining the Role of Public Investment for Macroeconomic Performance

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Author Info
Ismihan, Mustafa
Ozkan, F Gulcin
Abstract

This paper explores the implications of public investment for macroeconomic performance within a simple two-period policymaking model. We show that under the balanced-budget rule, the contribution of public investment to future output plays a key role in determining its effects on macroeconomic performance. When policymakers resort to debt issue in financing expenditures, the attractiveness of public investment crucially depends on the return from capital spending relative to the cost of public borrowing. We also consider the case of a capital borrowing rule where only public investment could be financed by additional borrowing and find similar results. Our findings point to the key role of the quality of public investment in its impact on macroeconomic outcome and highlight the importance of efficient mechanisms for selection, implementation and monitoring of public investment projects in both developed and developing countries.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6139.

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Date of creation: Feb 2007
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Handle: RePEc:cpr:ceprdp:6139

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Related research
Keywords: macroeconomic performance; public debt; public investment;

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management

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  16. Ozkan, F Gulcin, 2000. " Who Wants an Independent Central Bank? Monetary Policy-Making and Politics," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(4), pages 621-43, December. [Downloadable!] (restricted)
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