Public Investment, Time to Build, and the Zero Lower Bound

Hafedh Bouakez, Michel Guillard () and Jordan Roulleau-Pasdeloup

Review of Economic Dynamics, 2017, vol. 23, 60-79

Abstract: We study the effectiveness of public investment in stimulating an economy stuck in a liquidity trap. We do so in the context of a tractable new-Keynesian economy in which a fraction of government spending increases the stock of public capital subject to a time-to-build constraint. Public investment projects typically entail significant time-to-build delays, which often span several years from approval to completion. We show that this feature implies that the spending multiplier associated with public investment can be substantially large --- nearly twice as large as the multiplier associated with public consumption --- in a liquidity trap. Intuitively, when the time to build is sufficiently long, and to the extent that public capital raises the marginal productivity of private inputs, the resulting disinflationary effect will occur after the economy has escaped from the liquidity trap. At the same time, the increase in households' expected wealth amplifies aggregate demand while the economy is still in the liquidity trap. Using a medium-scale model extended to allow for the accumulation of public capital, we quantify the multiplier associated with the spending component of the 2009's ARRA, which allocated roughly 40% of the authorized funds to public investment. We find a peak multiplier of 2.31. Our results also indicate that failing to account for the composition of the stimulus by overlooking its investment component would lead one to underestimate the spending multiplier by about 50%. (Copyright: Elsevier)

Keywords: Public spending; Public investment; Time to build; Multiplier; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E4 E52 E62 H54 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

Downloads: (external link)
https://dx.doi.org/10.1016/j.red.2016.09.001
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See https://www.sciencedirect.com/ for details.

Related works:
Working Paper: Public investment, time to build, and the zero lower bound (2017)
Software Item: Code and data files for "Public Investment, Time to Build, and the Zero Lower Bound" (2016)
Working Paper: Public Investment, Time to Build, and the Zero Lower Bound (2016)
Working Paper: Public Investment, Time to Buid, and the Zero Lower Bound (2014)
Working Paper: Public Investment, Time to Build, and the Zero Lower Bound (2014)
Working Paper: Public Investment, Time to Build, and the Zero Lower Bound (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:issued:15-342

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2016.09.001

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().