the external competitiveness of the economy, which is reflected in exports and imports, with exports decreasing when prices increase. Exports recover only in the medium to long run when the supply-side effects of productive public capital reduce marginal costs and hence inflation, which restores and improves external competitiveness. Private investment initially increases, then decreases in the medium term, and recovers in the longer run.16 Labour falls if there is a planing delay, and the fall is more pronounced the longer the delay is. This happens because households anticipate the increase in resources in the future and increase their consumption. The wealth effect reduced the supply of labour and this leads to an increase in wages. Firms, observing the increase in wages, reduce the demand for labour (and increase the demand for capital, causing an increase in investment), as labour becomes less attractive due to higher wages.17

In the long run, shown in Figure 1 as the dot on the extreme right-hand side of the plots, the benefits of higher public investment are obvious. Output, consumption, private investment and wages all increase. There is a permanent decrease in labour services, caused by a reduction in labour supply by households. This happens despite the increase in public debt (recall that the increase in public investment is debt-financed), because higher public capital implies larger productivity and more available resources, which compensates for higher taxes needed to finance higher level of public investment.18

Note that the paths of inflation and to some extent output look very much like a standard business cycle that was caused by first a negative and then a positive supply shock. However, this behaviour is caused by only one (demand) shock and the effect of its announcement. Moreover, the longer the delay, the more pronounced the fluctuation is, and the cycle is longer (the increase is shifted further into the future when planning delays are longer). From the policy perspective, this can be problematic, because the state of the future business cycle is unknown when the public investment is announced. For instance, suppose an economy is in a recession and the government announces an increase in investment. Because of planning delays, this investment occurs in the future, when the economy may already be out of the recession and in a boom, which risks overheating the economy. Moreover, our results imply that announcing an increase in public investment during the recession will not help stimulate the economy in a countercyclical manner if there are long planning delays - note that output decreases during the planning phase. This implies that an increase in public investment during a downturn will help only if public investment is increased without delay.