Stock vs flow specification of public infrastructures: a dynamic analysis

Escobar-Posada Rolando A. () and Goncalo Monteiro
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Escobar-Posada Rolando A.: Pontificia Universidad Javeriana, Economics, Bogotá, Colombia
Authors registered in the RePEc Author Service: Rolando A. Escobar Posada

The B.E. Journal of Macroeconomics, 2018, vol. 18, issue 2, 14

Abstract: We develop a two-sector model of physical and human capital accumulation, in which the government may allocate resources to both sectors, thereby enhancing productivity. We analyze the impact of both the level of government spending and its composition on growth and welfare, and derive their respective growth-maximizing levels. We show that both the growth-maximizing and welfare-maximizing rates of allocation of public expenditure are independent of the way infrastructures are defined (flow or stock). This conclusion, however, does not extend to the dynamics of the model where the adjustment to fiscal policy is very different. After a tax cut, for instance, the growth rate of physical and human capital converge to the new equilibrium from opposite directions under the stock specification; whereas they converge from the same direction under the flow specification.

Keywords: economic growth; education; infrastructures; optimal tax policy (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/bejm-2016-0079

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