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Output Dynamics, Technology, and Public Investment

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  • Duarte Bom, P.R.
  • Heijdra, B.J.
  • Ligthart, J.E.

    (Tilburg University, Center for Economic Research)

Abstract

The 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 Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-58.

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Date of creation: 2010
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Handle: RePEc:dgr:kubcen:201058

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Web page: http://center.uvt.nl

Related research

Keywords: Infrastructure capital; public investment; fiscal policy; output multipliers; transitional dynamics; technology;

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Cited by:
  1. 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.

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