TY - UNPB
T1 - Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules
AU - Duarte Bom, P.R.
AU - Ligthart, J.E.
PY - 2011
Y1 - 2011
N2 - We study the dynamic output and welfare effects of public infrastructure investment under a balanced budget fiscal rule, using an overlapping generations model of a small open economy. The government finances public investment by employing distortionary labor taxes. We find a negative short-run output multiplier, which (in absolute terms) exceeds the positive long-run output multiplier. In contrast to conventional results regarding public investment shocks, we obtain dampened cycles in output and the labor tax rate. The cyclical dynamics are induced by the interaction of households' finite life spans, the wealth effect on labor supply, and the balanced budget fiscal rule. Finally, we show that, for a plausible calibration of our model, households' lifetime welfare improves.
AB - We study the dynamic output and welfare effects of public infrastructure investment under a balanced budget fiscal rule, using an overlapping generations model of a small open economy. The government finances public investment by employing distortionary labor taxes. We find a negative short-run output multiplier, which (in absolute terms) exceeds the positive long-run output multiplier. In contrast to conventional results regarding public investment shocks, we obtain dampened cycles in output and the labor tax rate. The cyclical dynamics are induced by the interaction of households' finite life spans, the wealth effect on labor supply, and the balanced budget fiscal rule. Finally, we show that, for a plausible calibration of our model, households' lifetime welfare improves.
KW - Infrastructure capital
KW - public investment
KW - distortionary taxation
KW - fiscal policy
KW - Yaari-Blanchard overlapping generations
M3 - Discussion paper
VL - 2011-092
T3 - CentER Discussion Paper
BT - Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules
PB - Economics
CY - Tilburg
ER -