Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules
- Author(s)
- Pedro Bom, Jenny Ligthart
- Abstract
We study the dynamic macroeconomic 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. The balanced budget rule implies a negative short-run output multiplier that exceeds (in absolute terms) the positive long-run output multiplier. Larger public capital spillovers sharpen the intertemporal output tradeoff. In contrast to conventional results regarding public investment shocks, we obtain dampened cyclical responses for plausible parameter values. The cyclical dynamics arise from the interaction between the labor tax rate, the tax base, and the intergenerational spillover effects. We show that financing scenarios involving public debt creation can substantially reduce the short-run output contraction and the transitional macroeconomic fluctuations induced by public investment.
- Organisation(s)
- Department of Economics
- External organisation(s)
- Tilburg University, University of Groningen
- Journal
- Journal of Economic Dynamics and Control
- Volume
- 40
- Pages
- 334-354
- No. of pages
- 21
- ISSN
- 0165-1889
- DOI
- https://doi.org/10.1016/j.jedc.2014.01.018
- Publication date
- 03-2014
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502018 Macroeconomics
- Keywords
- ASJC Scopus subject areas
- Control and Optimization, Applied Mathematics, Economics and Econometrics
- Sustainable Development Goals
- SDG 9 - Industry, Innovation, and Infrastructure
- Portal url
- https://ucris.univie.ac.at/portal/en/publications/public-infrastructure-investment-output-dynamics-and-balanced-budget-fiscal-rules(059c0106-4ee2-4a47-a7e4-754b168a5c1b).html