Abstract
This paper analyzes the role of public capital when the services it yields is subject to two forms of congestion, which we characterize as relative and aggregate. We employ a two-sector growth model in which there are conventional profit-maximizing private firms, together with "public firms", whose objective is to produce a specified quantity of government investment goods --- determined by government policy --- at minimum cost. We characterize the equilibrium dynamics, and analyze two forms of fiscal disturbances --- an increase in public investment, and a decrease in the tax on capital income --- by simulating a calibrated economy. We contrast the effects of these two types of congestion on both the existing steady-state equilibrium, as well as for the effectiveness of fiscal policy.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have