DP1479 Public Investment and Endogenous Growth in a Small Open Economy

Author(s): George Alogoskoufis, Sarantis C Kalyvitis
Publication Date: September 1996
Keyword(s): Adjustment Costs, Endogenous Growth, Public Private Capital
JEL(s): H54, O41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1479

This paper examines the effects of three alternative rules for public investment on output growth in a model with private and public capital. The rules considered are: (i) a fixed ratio of public capital to output; (ii) a fixed growth rate for public capital; and (iii) a fixed ratio of public investment to output. We find that all these rules are closely associated with the growth rate of output and generate endogenous growth. A permanent change in the policy rule implies a new long-run growth rate of output, but the economy will only gradually approach the new steady state due to adjustment costs in private capital accumulation.