Government Investment and Fiscal Stimulus in the Short and Long Runs

This paper contributes to the debate about fiscal multipliers by studying the impacts of government investment in conventional dynamic stochastic general equilibrium models. The analysis considers two factors that are crucial to understanding the effect of government investment: implementation delays for building public capital projects and future fiscal adjustments to debt-financed spending. The paper demonstrates that implementation delays can produce small or even negative labor and output responses in the short run, while financing instruments and the productivity of public capital matter both quantitatively and qualitatively for long-run growth effects. These results are examined in several models with features relevant for studying government spending, including utility-yielding government consumption, time-to-build for private investment, and government production. Date: April 24, 2009. Department of Economics, Indiana University and NBER, [email protected]; Department of Economics, Indiana University, [email protected]; Congressional Budget Office, [email protected]. We thank Paul Cullinan, Bob Dennis, Jonathan Huntley, and Bob Sunshine for helpful comments. The views expressed in this paper are those of authors and should not be interpreted as those of the Congressional Budget Office. GOVERNMENT INVESTMENT AND FISCAL STIMULUS IN THE SHORT AND LONG RUNS 1