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A Note On Public Investment, Public Debt, And Macroeconomic Performance

  • Ismihan, Mustafa
  • Ozkan, F. Gulcin

This paper provides an assessment of public capital spending within a macroeconomic policy model with explicit monetary and fiscal interactions, in contrast to most of the existing analyses of public investment that utilize “real” general equilibrium models. As such, we are able to consider the interactions of public investment with inflation, taxation, and public debt. Our results indicate that a clear trade-off exists between the costs and benefits of public investment, as is the case in the existing literature. However, the use of a monetary-fiscal policy model rather than a “real” general equilibrium one enables us to trace the macroeconomic channels including monetary ones through which these costs and benefits are transmitted to the rest of the economy. To the extent that these costs and benefits vary between countries, our results provide a potential explanation for the mixed empirical findings on the real effects of public capital spending.

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

Volume (Year): 15 (2011)
Issue (Month): 02 (April)
Pages: 265-278

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Handle: RePEc:cup:macdyn:v:15:y:2011:i:02:p:265-278_99
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  1. K. N. Murty & A. Soumya, 2006. "Macro economic effects of public investment in infrastructure in India," Macroeconomics Working Papers 22372, East Asian Bureau of Economic Research.
  2. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  3. Ismihan, Mustafa & Gulcin Ozkan, F., 2004. "Does central bank independence lower inflation?," Economics Letters, Elsevier, vol. 84(3), pages 305-309, September.
  4. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  5. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  6. Ozkan, F Gulcin, 2000. " Who Wants an Independent Central Bank? Monetary Policy-Making and Politics," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 621-43, December.
  7. Evans, Paul & Karras, Georgios, 1994. "Are Government Activities Productive? Evidence from a Panel of U.S. States," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 1-11, February.
  8. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," American Economic Review, American Economic Association, vol. 93(5), pages 1522-1542, December.
  9. Marrero, Gustavo A., 2008. "Revisiting The Optimal Stationary Public Investment Policy In Endogenous Growth Economies," Macroeconomic Dynamics, Cambridge University Press, vol. 12(02), pages 172-194, April.
  10. Alfredo M. Pereira, 2000. "Is All Public Capital Created Equal?," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 513-518, August.
  11. Khan, Mohsin S & Kumar, Manmohan S, 1997. "Public and Private Investment and the Growth Process in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 69-88, February.
  12. Canning, David & Bennathan, Esra, 2000. "The social rate of return on infrastructure investments," Policy Research Working Paper Series 2390, The World Bank.
  13. Catherine J. Morrison & Amy Ellen Schwartz, 1992. "State Infrastructure and Productive Performance," NBER Working Papers 3981, National Bureau of Economic Research, Inc.
  14. Esfahani, Hadi Salehi & Ramirez, Maria Teresa, 2003. "Institutions, infrastructure, and economic growth," Journal of Development Economics, Elsevier, vol. 70(2), pages 443-477, April.
  15. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
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