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Revisiting the optimal stationary public investment policy in endogenous growth economies

  • Gustavo A. Marrero

    ()

    (Universidad de la Laguna; Universidad Complutense de Madrid, Instituto Complutense de Análisis Económico (ICAE))

One strand of the literature on endogenous growth concerns models in which pub- lic infrastructure a¤ects the private production process. A puzzle in this literature is that observed public investment-to-output ratios for developed economies tend to fall short of theoretical model-based optimal ratios. We reexamine the optimal choice of public investment in a more general and plausible framework, which allows for a gradual transition between di¤erent steady states, a lower depreciation rate for public capital than for private capital, an elasticity of intertemporal substitution that di¤ers from unity and the need to nance a non-trivial share of public services in output in each period. Given other fundamentals in the economy, we show that the optimal public investment-to-output ratio is smaller for low-growth economies, for economies populated by consumers with low preferences for substituting consumption intertem- porally and when public capital is durable. Moreover, for a calibrated economy, we show that a combination of these factors solves the public investment puzzle.

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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 0509.

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Length: 25 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:ucm:doicae:0509
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