Syndicate content

Add new comment

Submitted by Shanta on

Dear Hans: Thanks for those insightful comments. On your first point, the effect doesn't depend on the foreign-goods' share in public consumption v. investment. As long as the domestic-goods' share in public investment is not zero (which it never is, given that construction is such a large component), then the effect of a cut in public investment lowering domestic prices (relative to the counterfactual), and that in turn leaving more public resources for transfers to consumers goes through. On your second point, you are right, and there are many reasons why public expenditure may be asymmetric between up and down swings. It may not be optimal to build half a bridge. Furthermore, there may be learning-by-doing in investing, and this learning is lost when you cut back public investment in the downswing (the Cameroonians discovered this). While we don't have these effects in the model, note that we do include the "crowding-in" effect of public investment on private investment. Since this is the most commonly used argument by policymakers for protecting public investment in downswings, we thought we would incorporate it. That the optimal strategy is to cut public investment despite its benefits to private investment is signficant for policy.