Make America Great: Long-Run Impacts of Short-Run Public Investment

Abstract

We document S-shaped dynamics of the US economy associated with the construction of the Interstate Highway System in the 1960s. We then propose a business cycle model with two steady states arising due to productive public capital and production non-convexities. Small-scale short-run public investment programs generate transitory responses while large-scale ones can produce long-run impacts. Our quantitative analysis highlights the critical role played by public investment in explaining the economic dynamics around the 1960s. However, it casts doubt on the efficiency of a large public investment expansion in the post-Great Recession era.

Keywords: Public Investment, Nonlinear Dynamics, Business Cycles, Multiple Steady States

JEL Classification: E32, E62, H54