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Revisiting The Optimal Stationary Public Investment Policy In Endogenous Growth Economies


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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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 12 (2008)
Issue (Month): 02 (April)
Pages: 172-194

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Handle: RePEc:cup:macdyn:v:12:y:2008:i:02:p:172-194_06
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