Simple Analytics of the Government Investment Multiplier
Chunbing Cai, Jordan Roulleau-Pasdeloup

TL;DR
This paper introduces a unified, simple analytical framework using a Markov chain approach to evaluate the effects of public infrastructure investment across different economic scenarios, including liquidity traps.
Contribution
It develops a general solution method that encompasses existing models and provides a unified analysis of public investment multipliers in various macroeconomic conditions.
Findings
Multipliers can diverge with the duration of liquidity traps.
The framework simplifies analysis of public investment effects.
It unifies different scenarios within a single modeling approach.
Abstract
What are the effects of investing in public infrastructure? We answer this question with a New Keynesian model. We recast the model as a Markov chain and develop a general solution method that nests existing ones inside/outside the zero lower bound as special cases. Our framework delivers a simple expression for the contribution of public infrastructure. We show that it provides a unified framework to study the effects of public investment in three scenarios: normal times short-lived liquidity trap long-lived liquidity trap. We find that calibrations commonly used lead to multipliers that diverge with the duration of the trap.
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Taxonomy
TopicsFiscal Policy and Economic Growth · Climate Change Policy and Economics · Transportation Planning and Optimization
