The Macroeconomic Consequences of Infrastructure Investment

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.

Policy Mix During a Pandemic Crisis: A Review of the Debate on Monetary and Fiscal Responses and the Legacy for the Future

“…In the short term, implementation lags are an obvious potential treat. Over longer horizons, the growthenhancing impact of this kind of public expenditure depends on the extent of the untapped potential in the public capital stock and on the complementarity between these initiatives and future private activity (Ramey, 2020). Indeed, public investments can be effective in fostering long-term growth in particular if they are instrumental in favouring private activities (as in the case of some infrastructure, energy, digital economy, and R&D projects) and the accumulation of human capital (including measures for the health sector).…”

The Direct Employment Impact of Public Investment

“…Economists have also utilized economic recessions to model and quantify the "job multipliers" of fiscal stimulus spending but with mixed results. For instance, the American Recovery and Reinvestment Act (ARRA) of 2009 is estimated to have yielded about six to eight jobs per US$1 million spent in the short term (Wilson, 2012;Garin, 2019;and Ramey, 2020); conversely, the Civilian Conservation Corps operating in the U.S. between 1933 and 1942-the archetype of public works-had negligible short-term employment impact (Aizer and others, 2020). 1 The focus of this paper is on public investment for the post-COVID-19 recovery phase, where social distancing is less relevant.…”

Take the Q Train: Value Capture of Public Infrastructure Projects

“…Literature Review Our paper relates to a large literature investigating the effectiveness of infrastructure investments. Previous research has found a wide range of estimates for the return on infrastructure investment, depending on the assumptions made on the efficiency of an expansion of the public capital stock, the strength of the crowd-out effect on private investment, and the timing vis-à-vis the business cycle (Cadot, Röller, and Stephan, 2006;Andonov, Kräussl, and Rauh, 2019;Castells and Solé-Ollé, 2005;Finkenzeller, Dechant, and Schäfers, 2010;Bom and Ligthart, 2014;Ramey, 2020). The uncertainty over these estimates suggests that the approach of inferring the returns to infrastructure investment from real estate return is a useful complement to the traditional approach.…”