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Working Paper

Optimal Fiscal Policy when Public Capital is Productive: A Business Cycle Perspective

This paper develops a dynamic general-equilibrium model with productive public capital to help account for differences in the business cycle characteristics of public- versus private-sector expenditures in postwar U.S. data. A specification that allows for multiple stochastic shocks (to technology and depreciation rates) can reproduce a number of features describing the cyclical behavior of U.S. public investment and public consumption as well as other fiscal variables, such as average marginal tax rates and the government debt-to-output ratio. The model also delivers reasonable predictions for the behavior of private-sector aggregates. It is less successful, however, in capturing the large variability of public consumption expenditures in U.S. data, and it overpredicts the variability of the capital tax relative to the labor tax.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.


Suggested Citation

Lansing, Kevin. 1995. “Optimal Fiscal Policy when Public Capital is Productive: A Business Cycle Perspective.” Federal Reserve Bank of Cleveland, Working Paper No. 95-07. https://doi.org/10.26509/frbc-wp-199507