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Output Dynamics, Technology, and Public Investment

Author

Listed:
  • Duarte Bom, P.R.

    (Tilburg University, Center For Economic Research)

  • Heijdra, B.J.
  • Ligthart, J.E.

    (Tilburg University, Center For Economic Research)

Abstract

The paper studies the dynamic output effects of public infrastructure investment in a small open economy. We develop an overlapping generations model that includes a production externality of public capital and a wealth effect on labor supply. Public capital enters the firm's production function under various technological scenarios. We show that if factors of production are gross complements and public capital is Solow neutral, which is the empirically plausible case, the long-run output multiplier falls short of its Hicks-neutral value. The way in which public capital augments factor productivity crucially affects the dynamics of private capital and net foreign assets, but yields qualitatively similar output dynamics. In contrast to conventional results obtained from hysteretic models, we find non-monotonic output dynamics of a public investment impulse in the non-hysteretic model. Schmitt-Grohe and Uribe's (2003) finding of identical impulse responses across the two model types is thus not robust to the inclusion of spillovers of public capital.

Suggested Citation

  • Duarte Bom, P.R. & Heijdra, B.J. & Ligthart, J.E., 2010. "Output Dynamics, Technology, and Public Investment," Discussion Paper 2010-58, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:39238188-f882-4db5-a834-ae751cd84b84
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    References listed on IDEAS

    as
    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    2. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
    3. Otto, Glenn D. & Voss, Graham M., 1998. "Is public capital provision efficient?," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 47-66, June.
    4. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series 2234, CESifo Group Munich.
    5. Michael J. Boskin & Lawrence J. Lau, 2000. "Generalized Solow-Neutral Technical Progress and Postwar Economic Growth," NBER Working Papers 8023, National Bureau of Economic Research, Inc.
    6. James Feehan, 1998. "Optimal Provision of Hicksian Public Inputs," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 693-707, August.
    7. Heijdra, Ben J. & Meijdam, Lex, 2002. "Public investment and intergenerational distribution," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 707-735, May.
    8. Rioja, Felix K., 1999. "Productiveness and welfare implications of public infrastructure: a dynamic two-sector general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 58(2), pages 387-404, April.
    9. Uzawa, H, 1969. "Time Preference and the Penrose Effect in a Two-Class Model of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 628-652, Part II, .
    10. Judd, Kenneth L., 1982. "An alternative to steady-state comparisons in perfect foresight models," Economics Letters, Elsevier, vol. 10(1-2), pages 55-59.
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    More about this item

    Keywords

    Infrastructure capital; public investment; fiscal policy; output multipliers; transitional dynamics; technology;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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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