Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules

P.R. Duarte Bom, J.E. Ligthart

Research output: Working paperDiscussion paperOther research output

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Abstract

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.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Volume2011-092
Publication statusPublished - 2011

Publication series

NameCentER Discussion Paper
Volume2011-092

Fingerprint

Public infrastructure
Fiscal rules
Infrastructure investment
Multiplier
Public investment
Labor tax
Finance
Tax rate
Calibration
Household models
Welfare effects
Wealth effect
Household
Labor supply
Government
Overlapping generations model
Small open economy
Life span
Short-run
Interaction

Keywords

  • Infrastructure capital
  • public investment
  • distortionary taxation
  • fiscal policy
  • Yaari-Blanchard overlapping generations

Cite this

Duarte Bom, P. R., & Ligthart, J. E. (2011). Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules. (CentER Discussion Paper; Vol. 2011-092). Tilburg: Economics.
Duarte Bom, P.R. ; Ligthart, J.E. / Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules. Tilburg : Economics, 2011. (CentER Discussion Paper).
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Duarte Bom, PR & Ligthart, JE 2011 'Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules' CentER Discussion Paper, vol. 2011-092, Economics, Tilburg.

Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules. / Duarte Bom, P.R.; Ligthart, J.E.

Tilburg : Economics, 2011. (CentER Discussion Paper; Vol. 2011-092).

Research output: Working paperDiscussion paperOther research output

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T1 - Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules

AU - Duarte Bom, P.R.

AU - Ligthart, J.E.

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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

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BT - Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules

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CY - Tilburg

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Duarte Bom PR, Ligthart JE. Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules. Tilburg: Economics. 2011. (CentER Discussion Paper).