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REVISITING THE OPTIMAL STATIONARY PUBLIC INVESTMENT POLICY IN ENDOGENOUS GROWTH ECONOMIES

Published online by Cambridge University Press:  01 April 2008

GUSTAVO A. MARRERO*
Affiliation:
Universidad de La Laguna
*
Address correspondence to: Gustavo A. Marrero, Departamento de Análisis Econó mico, Facultad de Ciencias Económicas, Universidad de La Laguna, Campus de Guajara, Santa Cruz de Tenerife, Tenerife, Spain; e-mail: gmarrero@ull.es.

Abstract

One part of the literature on endogenous growth concerns models where public infrastructure affects the private production process. An unsolved puzzle in this literature concerns observed public investment-to-output ratios for developed economies, which tend to fall short of theoretical model-based optimal ratios. We reexamine the optimal choice of public investment in a more general framework. This setting allows for long-lasting capital stocks, 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 nontrivial share of public services in output. 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. For a calibrated economy, we show that a combination of these factors solves the public investment puzzle.

Type
ARTICLES
Copyright
Copyright © Cambridge University Press 2007

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REVISITING THE OPTIMAL STATIONARY PUBLIC INVESTMENT POLICY IN ENDOGENOUS GROWTH ECONOMIES
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