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Working Paper 324 - Public Investment, Time-to-Build, and Fiscal Stimulus
We study the macroeconomic impacts of public investment surges and fiscal policy adjustments to debt-financed public investment using a neoclassical growth model. We focus on two important issues that are pervasive in publicly financed investment projects in low-income countries: gestation delays and public investment inefficiencies. The model is estimated for a typical low-income country. Three central messages emerge. First, assumptions about which fiscal instruments may adjust to stabilize debt are crucial for the ultimate impacts of changes in fiscal policy. Covering the cost of the investment program and stabilizing debt with tax increases or spending cuts can make government investment contractionary at longer horizons, by crowding out private investment and consumption. Second, government investment spending delivers small, positive, labor and output responses in the presence of time-to-build delays. Third, high-yielding public investment can substantially raise output and consumption, and be self-financing in the long run.