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

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

No 2014-03, Working Papers from Center for Research in Economics and Statistics

Abstract: Public investment represents a non-negligible fraction of total public expenditures. Yet, theoretical studies of the effects of public spending when the economy is stuck in a liquidity trap invariably assume that government expenditures are entirely wasteful. In this paper, we consider a new-Keynesian economy in which a fraction of government spending increases the stock of public capital–which is an external input in the production technology–subject to a time-to-build constraint. In this environment, an increase in public spending has two conflicting effects on current and expected inflation: a positive effect due to higher aggregate demand and a negative effect reflecting future declines in real marginal cost. We solve the model analytically both in normal times and when the zero lower bound (ZLB) on nominal interest rates binds. We show that under relatively short time-to-build delays, the spending multiplier at the ZLB decreases with the fraction of public investment in a stimulus plan. Conversely, when several quarters are required to build new public capital, this relationship is reversed. In the limiting case where a fiscal stimulus is entirely allocated to investment in public infrastructure, the spending multiplier at the ZLB is 4 to 5 times larger than in normal times when the time to build is 12 quarters

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)
Pages: 37
Date: 2014-01
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Public Investment, Time to Build, and the Zero Lower Bound (2017)
Working Paper: Public investment, time to build, and the zero lower bound (2017)
Working Paper: Public Investment, Time to Build, and the Zero Lower Bound (2016)
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)
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