Governmental activity and private capital adjustment (original) (raw)
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Government expenditure, capital adjustment, and economic growth
2006
We analyze within a dynamic model the growth impact of private capital investment if the accompanying adjustment costs are a function of governmental activity. The impact of the productive public input is twofold: it (i) enhances private capital productivity and (ii) reduces adjustment costs. We derive the equilibrium in which the investment ratio is constant and determine the equilibrium growth rate. Carrying out comparative dynamic analysis allows us to show that better infrastructure endowment unequivocally spurs the equilibrium growth rate whereas the result becomes ambiguous with respect to the impact of rivalry. Since a reduction in congestion lowers the individually perceived capital productivity such a policy may reduce the equilibrium growth rate. While it is not possible to find closed solutions of the model we simulate the growth rate for different parameter constellations.
Public Capital Accumulation and Private Sector Performance
Journal of Urban Economics, 1999
This paper analyzes the effects of public capital on private sector variables in a vector auto-regressive framework. Empirical results suggest first, that public capital follows a policy rule that relates public capital positively with lagged output and negatively with lagged employment. Second, public capital crowds in private capital while the long-term effects on employment are only marginally positive. Finally, a one-dollar increase in public capital increases private output in the long term by 65 cents. Accordingly, while public capital is productive its effects on output are much lower than claimed in the previous literature.
Public and private production in a two-sector economy
Journal of Macroeconomics, 2006
We develop a two-sector "non-scale" production model in which there are two types of firms, conventional profitmaximizing private firms, and what we call "public firms", whose objective is to produce a specified quantity of government investment goods-determined by government policy-at minimum cost. Furthermore, the production functions of the two sectors need not in general coincide. Using this two-sector production setup we characterize the equilibrium dynamics, and analyze a variety of fiscal disturbances. Because of the complexity of the model our analysis is carried out using simulations of a calibrated economy. We find that the effects of tax policies are remarkably robust with respect to the relative capital intensities of the two productive sectors. In contrast, the effects of government investment are much more sensitive to this aspect. One conclusion of this is that one can continue to employ the onesector Ramsey model to analyze tax policy in the presence of public capital without seriously jeopardizing the analysis. But one has to be more careful in analyzing the impact of public investment itself.
Public Investment, Congestion, and Private Capital Accumulation
The Economic Journal, 1998
This paper analyses the impact of public investment on the dynamics of private capital formation in an intertemporal optimising market-clearing framework. The key feature characterising the analysis is that the public good is treated as a durable capital good, subject to congestion. We show how in the presence of congestion the effect of government investment on private capital formation involves a tradeoff between the degree of substitution between private and public capital in production and the degree of congestion. Both lump-sum and distortionary tax ®nancing are considered, with this tradeoff being tightened in the latter case.
Transitional dynamics and welfare effects of the public investment/output ratio
In endogenous growth settings, long-run growth e¤ects are important for welfare, but they should not be the only consideration for policy evaluation. In this paper, welfare e¤ects along the …rst periods of the transition following a …scal policy reform are found to be of opposite sign to long-run e¤ects. Hence, fully characterizing the transitional dynamics is crucial when characterizing the e¤ects of downsizing public investment, an important …scal policy issue in industrialized economies. Starting from a standard …scal position and a benchmark parameter calibration, we show that downsizing public investment improves welfare under either capital or gross income taxes, provided public capital is not very productive. On the other hand, downsizing is found to improve welfare with independence of the tax system considered for high levels of the unproductive public expenditure/output ratio, or for low values of the elasticity of intertemporal substitution, the discount factor and/or the public capital elasticity in the aggregate technology. Additionally, for high levels of the output elasticity of private capital, downsizing is shown to be optimal under the less distorting taxes, but not under gross income and capital income taxes.
Public infrastructure capital and private investment
In contrast to the traditional macroeconomic models of fiscal policy which focus on the effects of government financing decisions on key private macroeconomic variables, more recent models downplay the relevance of fiscal financing decisions and focus instead upon the ability of variations in real fiscal variables such as tax rates and the current/capital spending mix to alter private incentives to invest, produce and consume. Although the recent work recognises the necessity for budgetary control as an important ingredient of responsible macroeconomic policymaking, cuts in the ratio of capital to current expenditure programs are recognised to have potentially adverse effects on the economy's infrastructure which may impede future performance. During the latter part of the 1980s in Australia, fiscal tightening resulted in the reigning in of capital rather than current spending programs. Concern with this development has hitherto primarily focused upon the implications for output, productivity and trade performance. The purpose of this paper is to extend this focus by examining the implications for private investment behaviour. More specifically, this paper formulates and solves a dynamic rational expectations model which is designed to analyse the extent to which public capital spending impacts upon private investment behaviour. The analysis builds upon the work of Aschauer (1989) in allowing for the effects of both public investment and the public capital stock on private rates of return and on the decision to invest. The model's steady state properties are first described and it is then simulated to illustrate the short, and long, run effects of variations in the level of public infrastructure provision, on the rate of private corporate investment and other macroeconomic variables. Amongst the main findings are th at public infrastructure expenditure can 'crowd in' private investment.
Fiscal Policy in a Growing Economy with Public Capital
Macroeconomic Dynamics, 1997
Public capital subject to congestion is introduced into an endogenous growth model and the transitional dynamic paths under alternative fiscal policies are characterized. Several new insights are obtained from this more general framework. During the transition, the two capital stocks always approach their common equilibrium growth rate from opposite directions. Government policy induces the more volatile response in the capital stock upon which it impinges most directly: private capital in the case of a tax, public capital in the case of expenditure. Finally, we characterize a time-varying income tax that enables the decentralized economy to replicate both the first-best transitional dynamics and steady-state equilibrium of a centrally planned economy. The steady-state component corrects for externalities that arise when government expenditure deviates from its social optimum, and the effects of congestion. The transitional component corrects for myopic behavior by the representative agent along the adjustment path.
Empirical Economics, 2001
We analyze the dynamic relationship between public investment and output. Whereas existing empirical studies on the e¨ects of public capital typically rely on single-equation models of the private sector, we investigate the role of public investment in an economy by examining impulse responses derived from vector autoregressions. Using data from six industrial countries, we speci®cally examine the following questions: does higher public investment lead to GDP increases; is there reverse causation from output to public investment; and what are the e¨ects of expenditure-neutral budget shifts from public consumption to public investment.