Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules

Pedro Bom and Jenny Ligthart

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: We study the dynamic output and welfare effects of public infrastructure investment under a balanced budget fiscal rule, using an overlapping generations model of a small open economy. The government finances public investment by employing distortionary labor taxes. We find a negative short-run output multiplier, which (in absolute terms) exceeds the positive long-run output multiplier. In contrast to conventional results regarding public investment shocks, we obtain dampened cycles in output and the labor tax rate. The cyclical dynamics are induced by the interaction of households' finite life spans, the wealth effect on labor supply, and the balanced budget fiscal rule. Finally, we show that, for a plausible calibration of our model, households' lifetime welfare improves.

Keywords: Infrastructure capital; public investment; distortionary taxation; fiscal policy; Yaari-Blanchard overlapping generations (search for similar items in EconPapers)
Pages: 43 pages
Date: 2011-08-23
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://icepp.gsu.edu/files/2015/03/ispwp1119.pdf (application/pdf)

Related works:
Journal Article: Public infrastructure investment, output dynamics, and balanced budget fiscal rules (2014)
Working Paper: Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules (2011)
Working Paper: Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules (2011)
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:ays:ispwps:paper1119

Access Statistics for this paper

More papers in International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University Contact information at EDIRC.
Bibliographic data for series maintained by Paul Benson ().