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REVISITING THE OPTIMAL STATIONARY PUBLIC INVESTMENT POLICY IN ENDOGENOUS GROWTH ECONOMIES

Gustavo Marrero ()

Macroeconomic Dynamics, 2008, vol. 12, issue 2, 172-194

Abstract: One part of the literature on endogenous growth concerns models where public infrastructure affects the private production process. An unsolved puzzle in this literature concerns observed public investment-to-output ratios for developed economies, which tend to fall short of theoretical model-based optimal ratios. We reexamine the optimal choice of public investment in a more general framework. This setting allows for long-lasting capital stocks, a lower depreciation rate for public capital than for private capital, an elasticity of intertemporal substitution that differs from unity, and the need to finance a nontrivial share of public services in output. Given other fundamentals in the economy, we show that the optimal public investment-to-output ratio is smaller for low-growth economies, for economies populated by consumers with low preferences for substituting consumption intertemporally, and when public capital is durable. For a calibrated economy, we show that a combination of these factors solves the public investment puzzle.

Date: 2008
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Working Paper: Revisiting the optimal stationary public investment policy in endogenous growth economies (2005) Downloads
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