Coordinating short- and long-run public investment rules

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Coordinating short- and long-run public investment rules

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Gustavo A. Marrero () (Departamento de Economía Cuantitativa, Universidad Complutense de Madrid)

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Gustavo A. Marrero

Abstract

Modelling the accumulation rule evolving public investment is an issue of utmost interest among economists and politicians. The present paper extends the Barro (1990) model of productive government expenditure by considering a time-adapted rule for the public investment/output ratio. The rule allows a particular target on the public investment ratio to be achievable in the long-run. Additionally, throughout the transition, the government may adjust its period-by-period public investment/output ratio in response to the current productivity of public capital relative to its long-run level. The degree of this response depends on a short-run policy instrument, which is decided by the fiscal authority simultaneously to the long-run target ratio. That way, the government problem could be interpreted as a coordination problem between short- and long-term policies. In comparison with a constant-ratio rule, and under alternative taxing scenarios, important welfare improvements are found w hen coordinating the short- and the long-run policy instruments in an optimal way.

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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 0109.

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Date of creation: 2001
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Handle: RePEc:ucm:doicae:0109

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