Working Paper: NBER ID: w27625
Authors: Valerie A. Ramey
Abstract: Can greater investment in infrastructure raise U.S. long-run output? Are infrastructure projects a good short-run stimulus to the economy? This paper uses insights from the macroeconomics literature to address these questions. I begin by analyzing the effects of government investment in both a stylized neoclassical model and a medium-scale New Keynesian model, highlighting the economic mechanisms that govern the strength of the short-run and long-run impacts. The analysis confirms earlier findings that the implementation delays inherent in infrastructure projects reduce short-run multipliers in most cases. In contrast, long-run multipliers can be sizable when government capital is productive. Moreover, these multipliers are greater if the economy starts from a point below the socially optimal amount of public capital. Turning to empirical estimation, I use the theoretical model to explain the econometric challenges to estimating the elasticity of output to public infrastructure. Using both artificial data generated by simulations of the model and extensions of existing empirical work, I demonstrate how both general equilibrium effects and optimal choice of public capital are likely to impart upward biases to output elasticity estimates. Finally, I review and extend some empirical estimates of the short-run effects, focusing on infrastructure spending in the ARRA.
Keywords: No keywords provided
JEL Codes: E62; H41; H54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased government investment (H54) | higher long-run output (E23) |
| government investment (H54) | increased output through enhanced public capital (H54) |
| infrastructure investment (H54) | significant positive effects on long-run output and productivity (O49) |
| implementation delays in infrastructure projects (H54) | reduced short-run multipliers (E19) |
| long-run multipliers are greater if the economy starts from below socially optimal public capital (H54) | positive causal link between government investment and long-run productivity (H54) |