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Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules

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  • Duarte Bom, P.R.

    (Tilburg University, Center For Economic Research)

  • Ligthart, J.E.

    (Tilburg University, Center For Economic Research)

Abstract

We study the dynamic output and welfare effects of public infrastructure investment under a balanced budget fiscal rule, using an overlapping generations model of a small open economy. The government finances public investment by employing distortionary labor taxes. We find a negative short-run output multiplier, which (in absolute terms) exceeds the positive long-run output multiplier. In contrast to conventional results regarding public investment shocks, we obtain dampened cycles in output and the labor tax rate. The cyclical dynamics are induced by the interaction of households' finite life spans, the wealth effect on labor supply, and the balanced budget fiscal rule. Finally, we show that, for a plausible calibration of our model, households' lifetime welfare improves.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Duarte Bom, P.R. & Ligthart, J.E., 2011. "Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules," Discussion Paper 2011-092, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:31acc0a9-2c6d-4f6a-95ad-0ea6eba18102
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    More about this item

    Keywords

    Infrastructure capital; public investment; distortionary taxation; fiscal policy; Yaari-Blanchard overlapping generations;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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