Two Essays on Public Investment and Business Cycles

Advisor: Eduardo Zilberman

This paper proposes an otherwise standard neoclassical growth model extended for time-to-build process for public capital, varying capital utilization rate, adjustment costs in private investment and indivisible labor supply. Following a restrictive calibration for the U. S. economy, theoretical predictions are compared to the recent empirical evidence concerning the dynamic impacts of shocks to public investment. Results show that variable capacity utilization, together with adjustment costs, quantitatively accounts for GDP and employment empirical responses. This first assumption in the model also provides an economic intuition for the findings reported by the recent literature: they are consistent with plausible intertemporal substitution effects on investment decisions. Following this analysis, a standard neoclassical growth model extended for a time-to-build process for public capital and distortionary taxation is used to assess the short and long run effects of the Programa de Aceleração do Crescimento (PAC) in Brazil between 2007 and 2010. Findings suggest that the investment program may have actually induced short run slowdowns in the Brazilian economy due to implementation delays in public investment combined with distortive taxation. In addition, long run paths derived in the model depend on the adopted distortive financing as well as fiscal adjustment scheme. Finally, welfare effects associated to the programare smallanddecreaseasthe lagsinimplementationof government spendingincreases.