Optimal Fiscal Policy, Public Capital, and the Productivity Slowdown

This paper develops a quantitative theoretical model for the optimal provision of public capital. We show that the ratio of public to private capital in the U.S. economy from 1925 to 1992 evolves in a manner that is generally consistent with an optimal transition path derived from the model. The model is also used to quantify the conditions under which an increase in the stock of public capital is desirable and to investigate the effects of hypothetical nonoptimal fiscal policies on productivity growth.