Public Investment, Time to Build, and the Zero Lower Bound

Hafedh Bouakez, Michel Guillard () and Jordan Roulleau-Pasdeloup

No 16-09, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: We study the effectiveness of public investment in stimulating an economy stuck in a liquidity trap. We do so in the context of a tractable new-Keynesian economy in which a fraction of government spending increases the stock of public capital subject to a time-to-build constraint. Public investment projects typically entail significant time-to-build delays, which often span several years from approval to completion. We show that this feature implies that the spending multiplier associated with public investment can be substantially large — nearly twice as large as the multiplier associated with public consumption — in a liquidity trap. Intuitively, when the time to build is sufficiently long, and to the extent that public capital raises the marginal productivity of private inputs, the resulting disinflationary effect will occur after the economy has escaped from the liquidity trap. At the same time, the increase in households’ expected wealth amplifies aggregate demand while the economy is still in the liquidity trap. Using a mediumscale model extended to allow for the accumulation of public capital, we quantify the multiplier associated with the spending component of the 2009’s ARRA, which allocated roughly 40% of the authorized funds to public investment. We find a peak multiplier of 2.31. Our results also indicate that failing to account for the composition of the stimulus by overlooking its investment component would lead one to underestimate the spending multiplier by about 50%.

Keywords: Public spending; Public investment; Time to build; Multiplier; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E4 E52 E62 H54 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Public Investment, Time to Build, and the Zero Lower Bound (2017)
Working Paper: Public investment, time to build, and the zero lower bound (2017)
Working Paper: Public Investment, Time to Buid, and the Zero Lower Bound (2014)
Working Paper: Public Investment, Time to Build, and the Zero Lower Bound (2014)
Working Paper: Public Investment, Time to Build, and the Zero Lower Bound (2014)
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