Public Investment, Debt, and Welfare: A Quantitative Analysis

29 Pages Posted: 17 May 2019 Last revised: 4 Nov 2019

See all articles by Santanu Chatterjee

Santanu Chatterjee

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

John Gibson

Georgia State University - Department of Economics

Felix K. Rioja

Georgia State University - Department of Economics

Date Written: January 24, 2018

Abstract

In this paper, we examine the relationship between infrastructure investment and economic welfare in the context of a heterogeneous agent, incomplete-markets economy. Using a quantitative model to match the key aggregate and distributional features of the U.S. economy over the period 1990-2015, we show that the welfare-maximizing share of public investment in GDP depends critically on whether one internalizes the transition path between stationary equilibria or not. When welfare changes are evaluated by only comparing long-run stationary equilibria, the model implies that the government should increase infrastructure investment above its average share of 4 percent of GDP in the data. However, once the transition path and short-run dynamics are internalized, welfare maximization generates an intertemporal trade-off in the path of infrastructure spending: a short-run increase significantly above its observed share in the data, but a long-run decline below this share to satisfy the government’s budget constraint.

Keywords: Infrastructure, public investment, heterogeneous agents, public debt, welfare, transitional dynamics

JEL Classification: E2, E6, H3, H4, H6

Suggested Citation

Chatterjee, Santanu and Gibson, John and Rioja, Felix Korman, Public Investment, Debt, and Welfare: A Quantitative Analysis (January 24, 2018). Journal of Macroeconomics, Vol. 56, June 2018, Andrew Young School of Policy Studies Research Paper Series No. 19-17, Available at SSRN: https://ssrn.com/abstract=3374557 or http://dx.doi.org/10.2139/ssrn.3374557

Santanu Chatterjee (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Department of Economics
University of Georgia
Athens, GA 30602
United States
706-542-1709 (Phone)

HOME PAGE: http://https://sites.google.com/view/schatterjee/home

John Gibson

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

Felix Korman Rioja

Georgia State University - Department of Economics ( email )

University Plaza
35 Broad Street
Atlanta, GA 30303
United States
404-651-0417 (Phone)
404-651-4985 (Fax)

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