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Factor-biased public capital and private capital crowding out

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  • Bom, Pedro R.D.
Abstract
This paper studies the dynamic effects of public investment on private capital accumulation in a general equilibrium macroeconomic model of a small open economy with factor-biased public capital. I show that public investment induces rather complex private capital dynamics—falling in the short and in the long run, but potentially increasing along transition—if public capital augments private capital and private inputs are gross complements in production. Whether private investment is crowded in or out during transition critically depends on parameters that are empirically hard to measure, such as the labor supply elasticity and the elasticity of substitution between private inputs—a small increase in the latter from 0.5 to 0.6, for instance, turns a totally negative transitional effect into a predominantly positive one. These results help rationalize the lack of empirical consensus on the relationship between public and private investment.

Suggested Citation

  • Bom, Pedro R.D., 2017. "Factor-biased public capital and private capital crowding out," Journal of Macroeconomics, Elsevier, vol. 52(C), pages 100-117.
    • Handle: RePEc:eee:jmacro:v:52:y:2017:i:c:p:100-117
    DOI: 10.1016/j.jmacro.2017.03.002
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    References listed on IDEAS

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    Cited by:

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    3. Gerasimos T. Soldatos, 2019. "Public-private investment substitutability-complementarity, taxation, and bank competition," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2019(3), pages 41-61.

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    More about this item

    Keywords

    Public investment; Public capital; Infrastructure capital; Private capital; Crowding out; Factor bias;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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