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Revisiting the optimal stationary public investment policy in endogenous growth economies

Marrero, Gustavo A. (2005) Revisiting the optimal stationary public investment policy in endogenous growth economies. [Working Paper or Technical Report]

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Abstract

One strand of the literature on endogenous growth concerns models in which public infrastructure affects 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 diferent steady states, a lower depreciation rate for public capital than for private capital, an elasticity of intertemporal substitution that differs from unity and the need to finance 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 intertemporally and when public capital is durable. Moreover, for a calibrated economy, we show that a combination of these factors solves the public investment puzzle.

Item Type:Working Paper or Technical Report
Additional Information:E13, E62, O41
Uncontrolled Keywords:Public investment, Stationary policy, Endogenous growth
Subjects:Social sciences > Economics > Public economy
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2005
Number:0509
ID Code:7902
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Deposited On:22 May 2008
Last Modified:06 Feb 2014 07:56

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