Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces
By Edward F. Buffie, Andrew Berg, Catherine A. Pattillo, Rafael A. Portillo, Luis-Felipe Zanna. Social Science Research Network, 2012
153 citations recorded by the source corpus.
We develop a model to study the macroeconomic effects of public investment surges in low-income countries, making explicit: (i) the investment-growth linkages; (ii) public external and domestic debt accumulation; (iii) the fiscal policy reactions necessary to ensure debt-sustainability; and (iv) the macroeconomic adjustment required to ensure internal and external balance. Well-executed high-yielding public investment programs can substantially raise output and consumption and be self-financing in the long run. However, even if the long run looks good, transition problems can be formidable when concessional financing does not cover the full cost of the investment program. Covering the resulting gap with tax increases or spending cuts requires sharp macroeconomic adjustments, crowding out private investment and consumption and delaying the growth benefits of public investment. Covering the gap with domestic borrowing market is not helpful either: higher domestic rates increase the financing challenge and private investment and consumption are still crowded out. Supplementing with external commercial borrowing, on the other hand, can smooth these difficult adjustments, reconciling the scaling up with feasibility constraints on increases in tax rates. But the strategy may be also risky. With poor execution, sluggish fiscal policy reactions, or persistent negative exogenous shocks, this strategy can easily lead to unsustainable public debt dynamics. Front-loaded investment programs and weak structural conditions (such as low returns to public capital and poor execution of investments) make the fiscal adjustment more challenging and the risks greater.
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/9497a3bba9bad768f9e2d9fadba3f258169a5d91
Citations in the corpus
- The Effects of Weather Shocks on Economic Activity: What are the Channels of Impact? (2018, unknown): “Our simulations are based on the Debt, Investment and Growth (DIG) model of Buffie et al. (2012), which captures various aspects pertinent to low-income countries—such as low public investment efficiency and high capital adjustment costs—and can be extended easily to incorporate the structural…”
- Investing in public investment: an index of public investment efficiency (2012, unknown): “Another recent paper utilizing PIMI is Buffie et al. (2011) who develop a model to study the medium-to-long run macroeconomic effects of externaldebt financed public investment expansions in low income countries.”