Working Paper: CEPR ID: DP9977
Authors: Bernardo Guimaraes; Caio Machado
Abstract: This paper proposes a simple macroeconomic model with staggered investment decisions. The expected return from investing depends on demand expectations, which are pinned down by fundamentals and history. Owing to an aggregate demand externality, investment subsidies can improve welfare in this economy. The model can be used to address questions concerning the timing of stimulus policies: should the government spend more on preventing the economy from falling into a recession or on rescuing the economy when productivity picks up? Results show the government should strike a balance between both objectives.
Keywords: Coordination; Demand Expectations; Fiscal Stimulus; Timing; Frictions
JEL Codes: D84; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government investment subsidies (H54) | welfare (I38) |
| government investment subsidies (H54) | investment decisions (G11) |
| investment decisions (G11) | demand for investments (E41) |
| sufficient mass of producers operating at full capacity (D24) | demand for investments (E41) |
| government stimulus (H81) | investment decisions (G11) |
| investment decisions (G11) | positive externalities (D62) |
| more producers active (E23) | lower productivity requirements for investment (E22) |
| constant subsidy (H23) | shift equilibrium threshold for investment decisions (D53) |