TITLE:
Can an Increase of Infrastructure Spending Contribute to Higher Potential Output in the Medium and Longer Term?
AUTHORS:
Maria Rita Pierleoni
KEYWORDS:
Potential Output, Cyclical Fluctuations, Persistence, Policy Implications, Additional Infrastructure Spending
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.7,
October
16,
2019
ABSTRACT: This discussion on recent economic literature concerns
some issues on potential output and related policy implications. It is not
clear to what extent potential output growth has been affected by the recent
crisis. Then the actual stabilization policies—based on
the existence of output gaps and public debt sustainability—might not be
appropriate to mitigate effectively cyclical fluctuations and to stimulate
economic growth. The recent empirical evidence on the determinants of potential
output—i.e. the origin of cyclical
fluctuations—leads to a higher uncertainty
on potential output measurement. Moreover the existing methods to
estimate potential output present some weaknesses reducing reliability of the
estimation results. Focusing on European case, the measure of potential output
is considered as an useful guidance for policy. In particular, Stability and
Growth Pact and Treaty on Stability, Coordination and Governance in the
Economic and Monetary Union refer to the concepts of potential output, output
gap and structural budget balance. Recently academics and some policy makers
have criticized these measures and the related austerity policy because they
worsened the economic situation. According to recent theoretical and empirical
contributions it is important to rethink at the role of fiscal policy, focusing
on fiscal stimulus and in particular on additional infrastructure spending
because it can positively affect GDP as well as potential output. A part of
this literature discusses extensively how public capital affects the economy.
Under certain conditions such as a good institutional framework and sound
projects, a higher spending on public infrastructure has a high economic impact.