Public Investment, Debt, and Welfare: A Quantitative Analysis
Journal of Macroeconomics, Vol. 56, June 2018
Andrew Young School of Policy Studies Research Paper Series No. 19-17
29 Pages Posted: 17 May 2019 Last revised: 4 Nov 2019
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: Suggested Citation