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Output Dynamics, Technology, and Public Investment

Output Dynamics, Technology, and Public Investment

The paper studies the dynamic output effects of public infrastructure investment in a small open economy. We develop an overlapping generations model that includes a production externality of public capital and a wealth effect on labor supply. Public capital enters the firm’s production function under various technological scenarios. We show that if factors of production are gross complements and public capital is Solow neutral, which is the empirically plausible case, the long-run output multiplier falls short of its Hicks-neutral value. The way in which public capital augments factor productivity crucially affects the dynamics of private capital and net foreign assets, but yields qualitatively similar out- put dynamics. In contrast to conventional results obtained from hysteretic models, we find non-monotonic output dynamics of a public investment impulse in the non-hysteretic model. Schmitt-Grohe and Uribe’s (2003) finding of identical impulse responses across the two model types is thus not robust to the inclusion of spillovers of public capital. JEL codes: E62, F41, H54
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Public Investment, Taxation and Transfer of Technology

Public Investment, Taxation and Transfer of Technology

Public Investment, Taxation and Transfer of Technology Kollias, Iraklis and Marjit, Sugata and Michelacakis, Nickolas.[r]

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Research prioritisation : a framework for monitoring public investment in science, technology and innovation, July 2013

Research prioritisation : a framework for monitoring public investment in science, technology and innovation, July 2013

Vision/opportunity: To focus on Future Networks and Communication to further develop Ireland’s global positioning in the ICT field, by building on existing research strengths and well established indigenous and FDI sectors, to enhance human capital and research capacity to address the current and future needs of this rapidly moving sector and to underpin Ireland’s global reputation through active participation in the development of technology and regulatory standards.

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Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules

Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules

For a plausible calibration of the model, we find dampened cyclical dynamics in key macroeconomic variables. The cycles are induced by the combination of finite planning hori- zons of households, the wealth effect on labor supply, and the balanced budget fiscal rule. A balanced budget permanent impulse to public investment increases long-run output and private consumption, which is in line with empirical evidence. The benchmark case of Cobb- Douglas preferences yields a long-run output multiplier of 2.25. In the short run, however, the strong decrease in employment causes an even larger output contraction, which is ac- companied by a decrease in private investment and private consumption. An elasticity of substitution between consumption and leisure larger than unity or a sufficiently large output elasticity of public capital or both increase the long-run output multiplier above the bench- mark value and exacerbate the negative short-run effect on employment, private investment, and output. Short-run private consumption rises, however.
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Output dynamics in an endogenous growth model

Output dynamics in an endogenous growth model

The ACF for output growth depends on the effects caused by both transitory and permanent shocks. In response to a favorable transitory shock, labor flows into the mar- ket and out of the human capital sector, causing output to increase at impact. Due to the presence of labor adjustment costs, firms do not adjust labor input completely in the current quarter. Their optimal response is to defer a part to the subsequent quarter. Hence, output rises again in the subsequent period. Eventually, the income effect of a technology shock begins to offset the substitution effect, causing hours and output to decline from their peak. This generates a hump-shaped IRF of output to technology shocks (see transitory IRF in figure 2). Thus, a favorable technology shock generates positive autocorrelation in the transitory component of output growth. As shown in figure 3, not only the impact effect of a technology shock but also the lagged effects are larger than in the EGM. This generates a stronger serial correlation in output growth.
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The Public Investment Gap: the Need for External Finance to Increase Public Investment

The Public Investment Gap: the Need for External Finance to Increase Public Investment

In September 2015, governments adopted the Sustainable Development Goals (SDGs) to be achieved by 2030 in order to guide international cooperation in pursuit of ambitious quantitative goals. Quantifying financing needs for the SDGs is complex and necessarily imprecise since estimates always rely on a host of assumptions, including the macroeconomic and policy environment, the shape of national and international trade policies, advances in technology (as well as access to and capacity to use that technology), the predicted impacts of shocks, stresses and climate change, and also the extent to which investments in one area have spill-overs (co- benefits or damages) in others (UNDP, 2018, p.10). To achieve the SDGs by 2030, countries will need to develop long-term strategies that take the goals seriously as time-bound, quantitative objectives. On current trends the world will miss the goals by a wide margin unless policies are improved, international cooperation is enhanced, and more public and private resources are brought to bear on financing the investments needed to achieve the SDGs. The literature shows that focusing on the marginal expansion of government services will not be sufficient to reach the SDGs (SDSN, 2015, p.7).
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Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules

Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules

government adheres to a balanced budget fiscal policy rule by employing distortionary labor taxes to finance public investment. To avoid trivial capital dynamics, we postulate adjustment costs of both private and public investment. In line with the literature on open economy macroeconomics, there is an internationally traded bond, which guarantees that households can use the current account of the balance of payments to smooth private consumption. Although a large number of our key results can be derived analytically, we provide a numerical simulation based on plausible parameters for a typical small open economy in the OECD area. We find that a balanced budget increase in public investment induces dampened cycles in output and other key macroeconomic variables, whereas existing public investment studies obtain monotonic impulse responses. The dampened cycles arise from the interaction of households’ finite planning horizons, the wealth effect on labor supply, and the government’s balanced budget rule. The non-monotonic transition paths do not depend on the presence of the public capital externality. However, in a framework of infinitely-lived households the cycles disappear, owing to the absence of a wealth effect on labor supply during transition. We show that private investment, employment, and output fall in the short run, reflecting the reduction in labor supply caused by distortionary labor taxes. However, more public investment increases long-run output. In the benchmark case, we find an output multiplier of 2.25, which falls short of the value of 2.71 found in the lump-sum tax financing case (cf. Bom, Heijdra, and Ligthart, 2010). In the long run, employment increases as long as the elasticity of substitution between consumption and leisure is larger than unity. On the one hand, this positive employment effect reinforces the long-run output effect. On the other hand, the higher intratemporal elasticity of labor supply increases labor market distortions and exacerbates the short-run output contraction. Finally, our numerical analysis reveals that a balanced budget public investment impulse improves households’ lifetime welfare in the benchmark calibration. This result suggests that public investment should be encouraged even if labor tax financing is distortionary.
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Staggered wages and output dynamics under disinflation

Staggered wages and output dynamics under disinflation

The model introduces staggered wage setting à la Taylor (1979, 1980) in the framework presented in Rankin (1998). The economy consists of a continuum of industries indexed by i ∈ [0,1], and a continuum of industry-specific household-unions. 2 Every industry produces a single differentiated perishable product and the goods market in each industry is competitive. Since we do not allow labour to move across industries, the household-union has monopoly power in the labour market. Preferences are CES over consumption goods which are gross substitutes. All firms have the same technology and households have the same preferences. There is no uncertainty in the model and agents perfectly foresee the future. The symmetry of the economy is broken by supposing staggered wages. We divide the economy into two sectors of equal size: industries i ∈ [0, ½] and industry-specific household-unions j ∈ [0,½] compose sector A, while industries i ∈ (½,1] and industry-specific household-unions j ∈ (½,1] compose sector B. In each sector, every two periods household-unions set nominal
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Output dynamics in an endogenous growth model

Output dynamics in an endogenous growth model

There is an extensive literature on testing for unit roots in GNP 10 . RBC theorists usually assume that technology shocks have a unit root or near unit root and, due to this assumed specifi- cation of technology shocks, standard RBC models are able to replicate the persistence found in U.S. output. However, endogenous growth models would replicate this stylized fact regardless of the specification of the shocks since, as pointed out by Mc Callum (1989), endogenous growth models that show constant returns to scale with regard to the factors that are accumulated exhibit the unit root property, which implies that transitory shocks affect the level of growing variables in the long-run 11 . Hence, relaxing the presumption underlying standard RBC models that growth components are determined by different factors from those causing business cycles improves the ability of the model to endogenously mimic this stylized fact.
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Political Institutions and the Dynamics of Public Investment

Political Institutions and the Dynamics of Public Investment

There are many possible directions for the next step in this research. On the experimental side, our design was intentionally very simple and used a limited set of treatments. The theory has interesting comparative static predictions about the e¤ect of other parameters of the model that we have not explored in this work, such as: the size of the quali…ed majority; the discount factor; the production technology; preferences; endowments; and depreciation rates. We have also limited the analysis to only two polar types of institutions that di¤er on the degree of centralization of decisions. Our political process does not have elections and parties, there is no executive branch or "president" to oversee the general interest common to all districts. Elections, parties, and non-legislative branches are all important components of most political systems, and incorporating such institutions into our framework would be a useful and challenging direction to pursue. Finally, it would be interesting to allow for a richer set of allocations, such as allowing debt …nancing or multiple public goods.
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Hong Kong Output Dynamics: An Empirical Analysis

Hong Kong Output Dynamics: An Empirical Analysis

It is very difficult to interpret the cointegrating vector since the three economies have different output mixes and the three-variable system is inherently atheoretical. However, one crucial implication of the presence of one cointegrating vector is that, in the long run, the dynamics of the output data is driven by two stochastic trend elements. The usual notion of convergence requires the existence of one and only one common stochastic trend (that is two cointegrating vectors in this case) in the system. In this sense, the cointegration test result is at odds with the convergence hypothesis. However, the presence of multiple stochastic trends may be consistent with a more general class of growth models. Durlauf (1989), for example, observes that if unit root persistence is generated by technology, it is likely to have different types of technological shocks affecting various sectors of an economy and, hence, its aggregate output. Further, differences in work habits, corporate cultures, and infrastructures can have persistent effects on output dynamics. Thus, it is not surprising to have more than one integrated technological shock behind output growth.
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Investment Specific Technology Shocks and Emerging Market Business Cycle Dynamics

Investment Specific Technology Shocks and Emerging Market Business Cycle Dynamics

technology shocks to address different questions in an international dimension have been studied in other papers previously, such as Boileau (2002), Raffo (2010) or Mandelman et al. (2011). This paper is more closely related to Jacob and Peersman (2013). They examined the driving sources of the US trade balance variability and found that the marginal efficiency investment shock -a shock that increases the efficiency of transforming investment goods into physical capital- accounts for most of the US trade balance fluctuations. Finally, since we show that a US originated investment specific technology shock is significantly important for the fluctuations of Mexican output and investment, our paper also relates to the literature that explores the importance of US shocks for the business cycle fluctuations of emerging market countries (see, for instance, Canova (2005) or Mackowiak (2007)). Different from these papers, we analyse the importance of US shocks within a structural model of IRBC and highlight the role of investment specific technical change.
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Real estate investment dynamics

Real estate investment dynamics

Due to these extensions, the propagation mechanism of shocks in Kydland and Prescott’s (1982) model is much more pronounced then in the basic setup. Suppose a posi- tive technology shock occurs, this will increase the current productivity of capital and labor. The current period becomes more attractive to work and produce, relative to conditions that are expected in future periods, so both, employment and output rise. It also may signal high productivity in subsequent periods. This will induce …rms to initiate investment projects now. The projects started will increase employment and output until they are com- pleted several periods later and this spreads the e¤ects of the shock forward into the future. This will remain true even if it turns out for the productivity increase to be transient, since the investment decision is modeled to be bounded as equally sized tranches over the entire time-to-build period. Since the capital stock is - possible inappropriately - increased and workers will be less willing to supply labor in future periods due to extensions in the boom time, the contingency of a future downturn is already inherent in the investment decision.
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Foreign Direct Investment, Information Technology and Economic Growth Dynamics in Sub-Saharan Africa

Foreign Direct Investment, Information Technology and Economic Growth Dynamics in Sub-Saharan Africa

Third, given that this research builds on theoretical elements developed in section 2, it is also worthwhile to articulate the relevance of the findings to the theoretical literature. The choice of three sets of economic growth indicators is meant to also assess conflicting theoretical perspectives in the literature. Accordingly, the Neo-classical Growth Model of Solow (1956) maintains that the effect of FDI on the output growth rate is impeded by diminishing returns in physical capital. Hence, according to the theoretical narrative, FDI can exclusively affect the level of impact on per capita output, but is unlikely to affect the growth rate of output, especially in the long run. Conversely, the New Theory of Economic Growth postulates that FDI affects both output per capita and its growth rate (Hassan, 2005). Our findings are consistent with both theories. On the one hand, they are in line with the New Theory of Economic Growth because FDI positively affects all three growth dynamics when modulated with ICT in the sampled host countries. On the other hand, the results are also broadly in accordance with the Neo-classical Growth Model of Solow because of consistent negative marginal effects from the interaction between FDI and ICT dynamics.
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Public Investment, Government Indebtedness and Transitional Dynamics

Public Investment, Government Indebtedness and Transitional Dynamics

This paper considers an endogenous growth model with public capital and government debt. In setting the level of public investment each period, the government is assumed to follow two fiscal rules that are commonly used in the growth literature: public investment is either equal to a constant fraction of output or equal to a constant share of tax revenues. In our model, we allow revenues to be raised by the government through progressive income taxation and bonds issue. For both fiscal rules, we show that the potential occurrence of either indeterminacy or instability crucially depends on whether the government is a debtor or a creditor. In particular, government indebtedness causes the economy to be prone to either belief-driven aggregate fluctuations or unstable dynamics. This is a novel result in the related literature which has largely overlooked the role of public debt as a possible contributing factor to the presence of indeterminacy and instability in growth models.
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Essays On Corporate Investment Dynamics

Essays On Corporate Investment Dynamics

ment after controlling for q. Researchers typically measure cash flow as profits net of R&D and SG&A. Because R&D and at least part of SG&A are actually investments, one should add them back to measure cash flow available for investment. After making this adjust- ment, we find that physical investment becomes more sensitive to cash flow than previously believed. On this dimension, the neoclassical theory fits the data worse after accounting for intangibles. In contrast, the R&D component of intangible investment is insensitive to cash flow, supporting the theory. Because SG&A’s investment component is difficult to measure, it remains unclear whether intangible investment overall is more sensitive than physical investment to cash flow. Financing constraints are unlikely to explain the oppos- ing cash flow results for physical and R&D capital, as financing constraints are arguably more severe for R&D capital due to its lower collateral value (Almeida and Campello, 2007; Falato, Kadyrzhanova, and Sim, 2013). More recent theories predict an investment–cash flow sensitivity even without financing constraints. 1 For example, diseconomies of scale can make cash flow informative about investment opportunities, even controlling for Tobin’s q. Without a full structural estimation, it is difficult to tell whether our cash flow results are driven by differences in financing constraints, diseconomies of scale, or some other source.
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The dynamics of investment, payout and debt

The dynamics of investment, payout and debt

The firm’s net debt level is a linear function of its net worth, with D t = (l i − 1)N t . The optimal net debt level is negative if l i < 1, which may happen for low tax rates, high levels of risk aversion and high investment return volatility (see Figure 2 in section 3.4 below). A firm with negative debt has more cash than debt. It is equivalent to an all-equity financed firm that has invested an amount K t in risky projects and an amount N t − K t = (1 − l i )N t > 0 in cash. As the firm’s fortunes improve, the firm increases the dollar amount of cash it holds and its stock of risky investments. If l i > 1 then the firm has a positive amount of debt. This happens for higher tax rates (see Figure 2 below). Thus higher tax rates do increase corporate borrowing, even though managers do not exploit interest tax shields fully. An increase in the firm’s net worth raises the firm’s amount of debt and its stock of capital.
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Dynamics of Monetary Policy and Output Nexus in Nigeria

Dynamics of Monetary Policy and Output Nexus in Nigeria

This paper critically examines the dynamic interaction between monetary policy tools in stimulating economic growth, as well as stabilizing the economy from external shocks in Nigeria. The paper considered key monetary time series variables and real growth of output in formulating Vector Autoregressive (VAR) models which showed interdependence interaction between the period of 1970 and 2007. The time series properties of the selected variables are examined using the Augmented Dickey-Fuller unit root test and the results revealed that only growth of real output and broad money supply are stationary at levels, while saving, lending and exchange rates were found stationary at first difference. The long-run dynamic interaction was established through the Johansen’s Trace and Maximum Eigenvalue tests. The pair-wise Granger-Causality test conducted showed that the growth rate of real output is not a leading indicator for any monetary variables. Other innovation accounting tests were also carried out like impulse responses function to test for the response of growth in real output to innovation shock on monetary variables. Also, the forecast error variance decomposition (FEVD) is used to decompose the monetary shock on the growth rate of real output in Nigeria. Proper policy recommendations were proffered based on the results emanated from the econometric analyses.
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The changing dynamics of short run output adjustment

The changing dynamics of short run output adjustment

Unlike in a craft economy, economies of scale conferred competitive advantage on large firms in mass production. The competitive pressures to better exploit it raised the minimum scale of fixed investment over time, which meant increasingly long gestation periods before new plants and equipment could begin operation. This in turn produced an inflexible structure of production that became the soft belly of the system as the stable economic conditions that defined the “Golden Age” began to unravel. The economic uncertainties of the 1970s – price volatility and increasingly unpredictable fluctuations in consumer demand– raised the risk of large scale fixed investments. As markets became more contingent and consumer demand more uncertain, the premium on flexibility increased, undermining mass production. Economies scope became increasingly more
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Inflation and output dynamics with firm-owned capital

Inflation and output dynamics with firm-owned capital

The paper is organized as follows: Section 2 outlines the model economy. The main novelty associated with having firm-owned capital is that price setters face a simultaneous choice problem: on the one hand, optimal price setting depends on the expected investment policy over the (random) lifetime of the chosen price. The reason is that the resulting capital holdings affect the firm’s marginal costs. On the other hand, a firm’s expected future price setting decisions are among the de- terminants of its expected returns to capital and hence are relevant for investment decision making. Section 2 has the following structure: First, we consider house- holds and firms and derive their respective first order conditions. Then we consider the implied linearized equilibrium conditions. In particular, we derive an inflation equation from averaging and aggregating optimizing price setting decisions. At this step we argue why some of the expectations entering a firm’s price setting decision
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