Delivering public investment efficiently: If possible, avoid delays
Thomas Conefrey*
Matija Lozej†
Gerard O'Reilly
Graeme Walsh\S
Abstract
Public investment can be used to affect the economy over the business cycle, but also to boost its long-term potential. However, public investment is often subject to delays related to planning, construction, or both. We show that these delays can materially affect the usefulness of public investment for managing the economy. In particular in the case of a downturn, a delay in delivering an announced public investment can worsen the downturn if public investment is not delivered quickly. If public investment that has been planned during the recession is delayed so that it occurs when the recession is over, it risks overheating the economy. Delays in the delivery of public investment shift the benefits from higher public capital further into the future and reduce welfare. These findings hold in the standard model as well as in the model with search frictions, but with search frictions planning delays become less concerning, because the business cycle induced by the delay becomes smoother.
JEL classification: E24, E32, E43, E52, F45.
Keywords: Public investment, Fiscal policy, Monetary Union.
*Central Bank of Ireland, Irish Economic Analysis; thomas.conefrey@centralbank.ie.
\daggerCentral Bank of Ireland, Irish Economic Analysis; matija.lozej@centralbank.ie.
\daggerCentral Bank of Ireland, Irish Economic Analysis; gerard.oreilly@centralbank.ie.
§Central Bank of Ireland, Irish Economic Analysis; graeme.walsh@centralbank.ie.
We are grateful to Christian Merkl and Valeria Patella for discussions and suggestions, as well as to the participants of the 29th International Conference on Macroeconomic Analysis and International Finance, workshop Fiscal policy and the role of cohesion funds in the European Union, 2nd annual Irish public economics workshop, and the participants of the Central Bank of Ireland economics seminar. The opinions expressed are those of the authors and do not reflect views of the Central Bank of Ireland or of the European System of Central Banks.