Public investment, time to build, and the zero lower bound

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

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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%. © 2016 Elsevier Inc.

Keywords: Public spending; Public investment; Multiplier; Zero lower bound; Time to build (search for similar items in EconPapers)
Date: 2017-01
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Citations: View citations in EconPapers (38)

Published in Review of Economic Dynamics, 2017, 23, pp.60--79. ⟨10.1016/j.red.2016.09.001⟩

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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 (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)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02877959

DOI: 10.1016/j.red.2016.09.001

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