Revisiting the optimal stationary public investment policy in endogenous growth economies”, Macroeconomic Dynamics

One strand of the literature on endogenous growth concerns models in which pub-lic infrastructure a¤ects the private production process. A puzzle in this literature is that observed public investment-to-output ratios for developed economies tend to fall short of theoretical model-based optimal ratios. We reexamine the optimal choice of public investment in a more general and plausible framework, which allows for a gradual transition between di¤erent steady states, a lower depreciation rate for public capital than for private capital, an elasticity of intertemporal substitution that di¤ers from unity and the need to \u85nance a non-trivial share of public services in output in each period. Given other fundamentals in the economy, we show that the optimal public investment-to-output ratio is smaller for low-growth economies, for economies populated by consumers with low preferences for substituting consumption intertem-porally and when public capital is durable. Moreover, for a calibrated economy, we show that a combination of these factors solves the public investment puzzle