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Revisiting the optimal stationary public investment policy in endogenous growth economies

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  • Gustavo A. Marrero

    ()
    (Universidad de la Laguna; Universidad Complutense de Madrid, Instituto Complutense de Análisis Económico (ICAE))

Abstract

One strand of the literature on endogenous growth concerns models in which pub- lic infrastructure a¤ects the private production process. A puzzle in this literature is that observed public investment-to-output ratios for developed economies tend to fall short of theoretical model-based optimal ratios. We reexamine the optimal choice of public investment in a more general and plausible framework, which allows for a gradual transition between di¤erent steady states, a lower depreciation rate for public capital than for private capital, an elasticity of intertemporal substitution that di¤ers from unity and the need to nance a non-trivial share of public services in output in each period. Given other fundamentals in the economy, we show that the optimal public investment-to-output ratio is smaller for low-growth economies, for economies populated by consumers with low preferences for substituting consumption intertem- porally and when public capital is durable. Moreover, for a calibrated economy, we show that a combination of these factors solves the public investment puzzle.

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Bibliographic Info

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 0509.

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Length: 25 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:ucm:doicae:0509

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Keywords: Public investment; Stationary policy; Endogenous growth.;

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Cited by:
  1. Marrero, Gustavo A. & Novales, Alfonso, 2007. "Income taxes, public investment and welfare in a growing economy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3348-3369, October.
  2. Nigar Hashimzade & Gareth D. Myles, 2009. "Growth and Public Infrastructure," Economics & Management Discussion Papers em-dp2009-03, Henley Business School, Reading University.
  3. Ismihan, Mustafa & Ozkan, F. Gulcin, 2011. "A Note On Public Investment, Public Debt, And Macroeconomic Performance," Macroeconomic Dynamics, Cambridge University Press, vol. 15(02), pages 265-278, April.
  4. Cavalcanti, Carlos B. & Marrero, Gustavo A. & Le, Tuan Minh, 2014. "Measuring the impact of debt-financed public investment," Policy Research Working Paper Series 6766, The World Bank.
  5. Gustavo Marrero, 2010. "Tax-mix, public spending composition and growth," Journal of Economics, Springer, vol. 99(1), pages 29-51, February.

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