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"text": "which has an extensive literature on its own, starting with Beaudry and Portier (2006). The key issue in that literature was whether a standard model can generate a typical economic boom, with an increase in output, consumption, investment, and employment immediately, even if productivity will only increase in the future. Den Haan and Kaltenbrunner (2009) have pointed out that this can happen in a closed economy if there are search frictions. Den Haan and Lozej (2011) showed that this can also be the case in an open economy. The reason is that in a standard model with search frictions, employing a worker is essentially an investment decision on behalf of a firm. When deciding to post a job vacancy, a firm looks at the present value of future profits that will be obtained by employing an additional worker.",
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"text": "This intertemporal dimension of hiring is what makes delays in the delivery of public investment particularly interesting, because while delays shift the productivity into the future, firms may still hire workers now in anticipation of future profits. If this mechanism is strong, it may make delays in public investment less costly. This interaction of search frictions and public investment has, to the best of our knowledge, only been investigated in the context of a closed real economy model by Matusche (2025). The importance of analysing this in an open economy stems from the fact that a productive element of the public capital lowers marginal costs of domestic producers and therefore improves the external competitiveness of the economy. This channel is particularly important in small open economies.",
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"text": "We investigate the interaction of the two types of delays described above with the search frictions in the context of a large policy model of a small open economy in a monetary union.[p5.3.4] To do so, we simulate a structural reform that leads to a permanent increase in public investment in a small open economy in Europe, Ireland, using a global model. We do so once in the standard setting, with no search frictions on the labour market, and once in the otherwise identical model, but where the standard labour market with staggered wage setting has been replaced by search frictions with staggered wage setting, closely following Gomes et al. (2023).",
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"text": "We find that a permanent increase in (productive) public investment always leads to an increase in output, consumption, and exports in the long run. Delays in delivering public investment always result in the benefits of higher output, exports and consumption occurring further in the future. In the case of planning delays, long delays can even result in output decreasing in the short run, implying that announcement of public investment in a recession, if not followed quickly by implementation, does not stimulate the economy. Moreover, it can lead to a fluctuation in the future that looks very much like a small business cycle. For example, if it coincides with a boom in the business cycle that is not related to public investment, this may exacerbate the boom and overheat the economy. In addition, the demand stimulus during the implementation phase of public investment worsens the external competitiveness of the economy."
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"text": "We also find that in the model with search frictions there is some front-loading of news about the future, in the sense that output, private consumption, private investment and employment can increase initially despite delays, but the increases are typically quite small compared to the long-run effects. This implies that even if there are search frictions, delays in delivering public investment can be harmful (although less so than in the standard model)."
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"text": "[p5.6.3]While we focus on Ireland (see Conefrey et al. (2024)), the issues of delays are general enough to apply to other small open economies in a monetary union.",
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