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

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

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

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

Research output: Working paper › Discussion paper › Other research output

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 language	English
Place of Publication	Tilburg
Publisher	Economics
Volume	2011-092
Publication status	Published - 2011

Publication series

Name	CentER Discussion Paper
Volume	2011-092

Keywords

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

Access to Document

2011-092

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title = "Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules",

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.",

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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

T3 - CentER Discussion Paper

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

PB - Economics

CY - Tilburg

ER -