Public Investment and Endogenous Growth in a Small Open Economy

Abstract

This paper examines the effects of three alternative rules for public investment on output growth in a model with private and public capital. The rules considered are: 1) a fixed ratio of public capital to output; 2) a fixed growth rate for public capital; and 3) a fixed ratio of public investment to output. We find that all these rules are closely associated with the growth rate of output and generate endogenous growth. A permanent change in the policy rule implies a new long-run growth rate of output, but the economy will only gradually approach the new steady state due to adjustment costs in private capital accumulation.

JEL Classification: H54, O41