The Macroeconomic Consequences of Infrastructure Investment
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Chapter in forthcoming NBER book Economics of Infrastructure Investment, Edward L. Glaeser and James M. Poterba, editors
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 key mechanisms that govern the strength of the short-run and long-run effects of government investment in productive public capital. Consistent with the literature, the analysis shows that multipliers typically fall when the implementation delays inherent in infrastructure projects and most other public capital are included in the models. In contrast, long-run multipliers can be sizeable as long as 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 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, with particular attention to infrastructure spending in the ARRA.
Comment, Jason Furman