The Return on Infrastructure Investment

Mid-America Freight Coalition 

Two researchers from the Federal Reserve Bank of San Francisco recently presented a paper at the 2012 NBER Macroeconomics Annual Conference entitled “Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment.”
Here’s the abstract:

We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of federal grant distributions among states, we construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. We find that shocks to federal highway funding positively affect local GDP both on impact and after six to eight years. However, we find no permanent effect (as of ten years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. Our results suggest that the transmission channel for these responses operates through initial funding leading to building, over several years, of public highway capital, which then temporarily boosts private sector productivity and local demand. To help interpret these findings, we develop an open economy New Keynesian model with productive public capital in which regions are part of a monetary and fiscal union. We show that our empirical responses are qualitatively consistent with an initial effect due to nominal rigidities and a subsequent medium-term productivity effect that arises once the public capital is put in place and available for production.

This article suggests that investment in transportation infrastructure continues to provide solid returns and that recent ARRA investments are even more effective in generating economic activity during periods of economic downturn.
Check out the full article.

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