Output Dynamics, Technology, and Public Investment

CentER Discussion Paper Series No. 2010-58

44 Pages Posted: 10 Jun 2010

See all articles by Pedro Bom

Pedro Bom

Tilburg University - Center and Faculty of Economics and Business Administration

Ben J. Heijdra

University of Groningen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Jenny E. Ligthart

Tilburg University - CentER, Department of Economics; University of Groningen - Faculty of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 31, 2010

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.

Keywords: Infrastructure capital, public investment, fiscal policy, output multipliers, transitional dynamics, technology

JEL Classification: E62, F41, H54

Suggested Citation

Bom, Pedro and Heijdra, Ben J. and Ligthart, Jenny E., Output Dynamics, Technology, and Public Investment (May 31, 2010). CentER Discussion Paper Series No. 2010-58. Available at SSRN: https://ssrn.com/abstract=1623224 or http://dx.doi.org/10.2139/ssrn.1623224

Pedro Bom (Contact Author)

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Ben J. Heijdra

University of Groningen - Department of Economics ( email )

P.O. Box 800
9700 AV Groningen
Netherlands
+31 50 363 7303 (Phone)
+31 50 363 7337 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Jenny E. Ligthart

Tilburg University - CentER, Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 8755 (Phone)
+31 13 466 4032 (Fax)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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