Output Dynamics, Technology, and Public Investment
AbstractThe paper studies the dynamic output effects of public infrastructure investment in a small open economy. We develop an overlapping generations model that includes a production externality of public capital and a wealth effect on labor supply. Public capital enters the firm's production function under various technological scenarios. We show that if factors of production are gross complements and public capital is Solow neutral, which is the empirically plausible case, the long-run output multiplier falls short of its Hicks-neutral value. The way in which public capital augments factor productivity crucially affects the dynamics of private capital and net foreign assets, but yields qualitatively similar output dynamics. In contrast to conventional results obtained from hysteretic models, we find non-monotonic output dynamics of a public investment impulse in the non-hysteretic model. Schmitt-Grohe and Uribe's (2003) finding of identical impulse responses across the two model types is thus not robust to the inclusion of spillovers of public capital.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-58.
Date of creation: 2010
Date of revision:
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Web page: http://center.uvt.nl
Infrastructure capital; public investment; fiscal policy; output multipliers; transitional dynamics; technology;
Other versions of this item:
- Pedro R. D. Bom & Ben J. Heijdra & Jenny Ligthart, 2010. "Output Dynamics, Technology, and Public Investment," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1024, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-21 (All new papers)
- NEP-DGE-2010-08-21 (Dynamic General Equilibrium)
- NEP-MAC-2010-08-21 (Macroeconomics)
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- Bom, Pedro R.D. & Ligthart, Jenny E., 2014.
"Public infrastructure investment, output dynamics, and balanced budget fiscal rules,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 40(C), pages 334-354.
- Duarte Bom, P.R. & Ligthart, J.E., 2011. "Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules," Discussion Paper 2011-092, Tilburg University, Center for Economic Research.
- Pedro R. D. Bom & Jenny Ligthart, 2011. "Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1119, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
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