Essays on investment : cycles, imbalances and convexity

Abstract

This thesis is a collection of essays on public investment. The thesis is introduced in Chapter One which addresses the motivation for the thesis and outlines the structure of the document. Chapter Two addresses the topic of cyclicality and discretion in Irish fiscal policy. In particular, we show that the level and nature of cyclicality varies across different expenditure components and we introduce a new definition of feasible discretion to take account of political imperatives in budgetary management. We find that overall government expenditure is acyclical and is most heavily influenced by a fiscal parsimony objective. Automatic stabilisers are efficiently countercyclical, feasible discretionary government consumption growth is orthogonal to economic fundamentals while feasible discretionary investment growth is strongly procyclical. Using official growth forecasts, we show that feasible discretionary investment growth is deliberately pro-cyclical. Chapter Three addresses the interaction of public and private capital stocks. We show for most developed countries that there is a long-term equilibrium relation between public and private capital and that investment growth of both varieties carries momentum from year to year. We find that imbalances in the relation of public and private capital are more likely to arise on foot of relatively inadequate public investment and are most likely to be corrected through a public sector adjustment. Private capital tends towards weak exogeneity. Given the source of most imbalances and the relative scale of the capital stocks, the elimination of relative investment deficits is likely to become increasingly challenging. Maintenance of the long-run equilibrium relation between the public and private capital stocks in the majority of countries will necessitate a marked increase in government capital spending and/or a sustained decline in the private capital stock.