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"text": "announcement of public investment is a surprise. The announcement is fully credible, the time path of public investment is known at the time of the announcement, and this includes the delays (planning or construction). Note that in this setting a surprise in the sense of the delay being longer than initially announced could be inferred from the charts shown below as the difference between the impulse responses in the charts. For instance, the effect of a 2-year delay, when the initial expectation is immediate implementation, could be computed as the difference between two corresponding impulse responses (this would be exact in a linear model, but is only approximate in our nonlinear setting). [p16.1.2]",
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"text": "4.1 Delays in delivering public investment in a standard model",
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"text": "Figure 1 shows the effects of the delays in planning, and Figure 2 shows the effects of the delays in construction (time-to-build) in the standard model without search frictions. In each figure, the top-left chart shows the path of public investment, and the adjacent chart shows the path of the public capital stock. The path of public capital is the same in both figures, as the source of the delay in public investment does not matter for the stock of the public capital (only the delay itself matters). The key difference, therefore, between planning and construction delays is in the timing when the outlays of funds and the associated payments for public investment goods occur.",
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"text": "This timing of events matters. In Figure 1, the planning delay leads to a period of time where agents in the economy know that public investment will happen in the future, but there is no demand or supply stimulus from public investment yet, because the expenditure has not yet occurred due to the planning delay. Such a planning delay is equivalent to an announcement effect of future outlays for public investment (and future increase in productivity due to higher stock of productive public capital). [p16.4.3]",
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"text": "Figure 1 shows three cases. The black line shows the case when public investment increases without any delay. This is the typical way public investment is analysed in standard cases that do not deal with delays, and therefore serves as a useful benchmark. The dashed red line shows the 2-year delay in planning, and the dotted blue line shows the 5-year delay in planning. Compared to the benchmark case when the stimulus occurs at the announcement, the delays in planning result in output falling slightly during the planning period, with the decrease being larger, the longer is the planning delay. Inflation increases upon announcement and also later in the future (when the demand stimulus occurs), and it remains elevated during the planning period. This is because during this period private consumption increases, and so does (mildly) private investment. The decline in output in the case of delays is due to the fall in net foreign demand, which is primarily caused by the decrease in exports and an increase in imports. Output starts to increase only after the stimulus begins and afterwards, and inflation falls further out in the future, when the demand stimulus eases and the supply effects from higher public capital prevail (recall that public capital is productive). The fluctuations in prices affect",
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"text": "[p16.6.1]In a linear model, the starting point of the simulation does not matter, but in a nonlinear model it does. However, the model is not very nonlinear and the movement away from the initial steady state is not large in the first few years, which makes the effect of the nonlinearity very small.",
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"text": "[p16.7.1]We do not consider the case where the possibility of delays affects the sentiment or increases uncertainty in the economy, which is beyond the scope of this paper.",
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