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Das Public Kapital: How Much Would Higher German Public Investment Help Germany and the Euro Area?

Given the backdrop of pressing infrastructure needs, this paper argues that higher German public investment would not only stimulate domestic demand in the near term and reduce the current account surplus, but would also raise output over the longer-run as well as generate beneficial regional spillovers. While time-to-build delays can weaken the impact of the stimulus in the short-run, the expansionary effects of higher public investment are substantially strengthened with an accommodative monetary policy stance—as is typical during periods of economic slack. The current low-interest rate environment presents a window of opportunity to finance higher public investment at historically favorable rates.

Production This paper focuses on the role of government investment and
productive public capital. Indeed, firms use public infrastructure (which is the
government capital stock) along with private capital and labor for production. A
simplified version of the production function is shown below: As in Baxter and
King (1993), Glomm and Ravikumar (1997), and Leeper and others (2010), an
increasing returns to scale with respect to productive public capital is assumed. A
higher stock of ...