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.
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Pintea, M., Turnovsky, S.J. Congestion and Fiscal Policy in a Two-Sector Economy with Public Capital: A Quantitative Assessment. Comput Econ 28, 177–209 (2006). https://doi.org/10.1007/s10614-006-9038-2
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DOI: https://doi.org/10.1007/s10614-006-9038-2