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Can the Composition of Capital Constrain Potential Output? A Gap Approach

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Abstract

Focusing on core-infrastructure capital vis-à-vis productive capital, we propose a macroeconomic method to determine both which type of capital shortage would be constraining potential output and what would be the optimal composition, or optimal ratio between these two types, of capital in any given period. This method is based on an adapted two-gap model, estimated via linear programming, and illustrated with the cases of Chile and Mexico over the 1950-2000 period. The results show that there appears to be an oscillating pattern over this period, with either type of capital shortage alternating each other. The results also show that, optimally, core infrastructure appears to support a variable level of productive investment over time. However, the shortage of productive capital would at least be as important as that of infrastructure capital, suggesting an optimal trade off between the two. That is, the social opportunity cost of investing in either type of capital would be determined by the gap between the optimal growth rates estimated from these two types of capital. For either type of capital, a macroeconomic shortage would mean that the economy as a whole is in a net state of shortage.

Suggested Citation

  • Jose Miguel Albala-Bertrand, 2004. "Can the Composition of Capital Constrain Potential Output? A Gap Approach," Working Papers 510, Queen Mary University of London, School of Economics and Finance.
  • Handle: RePEc:qmw:qmwecw:wp510
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    File URL: http://www.econ.qmul.ac.uk/media/econ/research/workingpapers/archive/wp510.pdf
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    1. Evans, Paul & Karras, Georgios, 1994. "Is government capital productive? Evidence from a panel of seven countries," Journal of Macroeconomics, Elsevier, vol. 16(2), pages 271-279.
    2. Edmar Bacha, 1989. "A three gap model of foreign transfers and GPD growth rate in developing countries," Textos para discussão 221, Department of Economics PUC-Rio (Brazil).
    3. J. M. Albala-Bertrand & E. C. Mamatzakis, 2001. "Is public infrastructure productive? Evidence from Chile," Applied Economics Letters, Taylor & Francis Journals, vol. 8(3), pages 195-198.
    4. Ernst R. Berndt & Bengt Hansson, 1991. "Measuring the Contribution of Public Infrastructure Capital in Sweden," NBER Working Papers 3842, National Bureau of Economic Research, Inc.
    5. Edmar Bacha, 1982. "Growth with limited supplies of foreign exchanges: a reappraisal of the two-gap model," Textos para discussão 26, Department of Economics PUC-Rio (Brazil).
    6. E. C. Mamatzakis, 1999. "Testing for long run relationship between infrastructure and private capital productivity: a time series analysis for the Greek industry," Applied Economics Letters, Taylor & Francis Journals, vol. 6(4), pages 243-246.
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    Cited by:

    1. Ward Romp & Jakob de Haan, 2007. "Public Capital and Economic Growth: A Critical Survey," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 8(s1), pages 6-52, April.
    2. Serkan Arslanalp & Fabian Bornhorst & Sanjeev Gupta & Elsa Sze, 2010. "Public Capital and Growth," IMF Working Papers 10/175, International Monetary Fund.

    More about this item

    Keywords

    Capital shortage; Potential output; Two-gap model; Linear programming;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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