Roads to Prosperity?: Assessing the Link Between Public Capital and Productivity
John G. Fernald
Federal Reserve Bank of San Francisco
FRB International Finance Discussion Paper No. 592
At a macroeconomic level, infrastructure and productivity are positively correlated in the United States and other countries. However, it remains unclear whether this correlation reflects causation and, if so, whether causation runs from infrastructure to productivity, or the reverse. This paper focuses on roads and finds that vehicle-intensive industries benefit disproportionately from road-building: when road growth changes, productivity growth changes more in industries that are more vehicle intensive. These results suggest that causation runs from infrastructure to productivity. However, there is no evidence that at the margin, roads offer an above-average return; road-building in essence offered a one-time boost to the level of productivity in the 1950s and 1960s. Finally, it appears that congestion significantly affects road-services at the margin, although congestion does not appear important before 1973.
JEL Classification: D24, E23, E62
Date posted: July 21, 1998