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Bridging micro and macro production functions: The fiscal multiplier of infrastructure investment

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  • Chang, Minsu
  • Lee, Hanbaek

Abstract

This paper investigates the fiscal multiplier of infrastructure investment using an estimated heterogeneous-firm general equilibrium model. We theoretically and quantitatively show that the firm-level non-rivalry in infrastructure usage drives a significant discrepancy in the estimated input elasticities between the firm and state levels. Moreover, it microfounds the increasing returns to scale assumption in a representative-agent framework (Baxter and King, 1993). The quantitative findings indicate a fiscal multiplier of approximately 1.15 over a 2-year horizon, suggesting a significantly greater net economic benefit than the representative-agent model prediction. This is due to the low sensitivity of the firm-level investment to the general equilibrium effect, followed by a significantly dampened crowding out.

Suggested Citation

  • Chang, Minsu & Lee, Hanbaek, 2026. "Bridging micro and macro production functions: The fiscal multiplier of infrastructure investment," Journal of Monetary Economics, Elsevier, vol. 157(C).
    • Handle: RePEc:eee:moneco:v:157:y:2026:i:c:s0304393225001448
    DOI: 10.1016/j.jmoneco.2025.103873
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    Keywords

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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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