The Macroeconomic Consequences of Government Investment Revisited

A large literature over several decades studies government investment through structural DSGE frameworks, empirical fiscal-multiplier estimates, and studies of the long-run productivity effects of public capital. Recent contributions show that investment-specific time-to-build gestation lags and the distortionary fiscal adjustments required for intertemporal government budget balance can compress short-run multipliers despite positive long-run returns. We reassess this mechanism in an estimated medium-scale New Keynesian model that replaces the Cobb–Douglas technology with an empirically supported CES production function. Public-investment expansions are implemented under jointly welfare-maximizing simple monetary and tax rules. The analysis quantifies how the elasticity of substitution between private and public capital, increasing returns to scale and optimal policy interactions shape the dynamic propagation of government-investment shocks and increase both the short-run and long-run productive gains to the government investment fiscal multiplier.