Revisiting the optimal stationary public investment policy in endogenous growth economies

Gustavo Marrero

Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: One strand of the literature on endogenous growth concerns models in which pub- lic infrastructure a¤ects the private production process. A puzzle in this literature is that observed public investment-to-output ratios for developed economies tend to fall short of theoretical model-based optimal ratios. We reexamine the optimal choice of public investment in a more general and plausible framework, which allows for a gradual transition between di¤erent steady states, a lower depreciation rate for public capital than for private capital, an elasticity of intertemporal substitution that di¤ers from unity and the need to nance a non-trivial share of public services in output in each period. 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 intertem- porally and when public capital is durable. Moreover, for a calibrated economy, we show that a combination of these factors solves the public investment puzzle.

Keywords: Public investment; Stationary policy; Endogenous growth. (search for similar items in EconPapers)
JEL-codes: E13 E62 O41 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2005
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Related works:
Journal Article: REVISITING THE OPTIMAL STATIONARY PUBLIC INVESTMENT POLICY IN ENDOGENOUS GROWTH ECONOMIES (2008)
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