PUBLIC-INVESTMENT, PRIVATE INVESTMENT, AND INFLATION

In this paper I investigate the short- and long-run effects of cutting investment in social infrastructure in a simple perfect foresight model. Even though the equilibrium capital stock falls, private investment increases in the short run provided the intertemporal elasticity of substitution is not extremely large. When the productivity of social infrastructure is comparable to or above that of private capital, inflation is likely to increase in the long run. Furthermore, inflation may be higher throughout the adjustment process if a modest degree of intertemporal substitution is possible.