Year: 2019 January, Volume 28 No. 2
It has been known that longer implementation delays in public investments result in sluggish accumulation of public capital. In models in which public capital determines firm productivity, the longer the duration of implementation delays, the higher the marginal costs which, in a New Keynesian economy means higher price markups. Consequently, higher mark-ups may increase the inflation rate, leading to an appropriate monetary policy response. Using a dynamic stochastic general equilibrium (DSGE) model, this theoretical note focuses on the relationships among government investments, firm pricing policy, and monetary policy. It addresses some aspects of public investment, and through simulations, characterizes how its effects are propagated throughout the macroeconomy. Using different scenarios pertaining to the duration of implementation delays, we employed stochastic simulations to determine how authorized budget shocks affect output, public investment, interest rates, wages, and prices. Of particular interest is the impact of implementation delays on the firm’s marginal costs and pricing dynamics. We found that implementation delays and sudden disbursement stops do condition the dynamic impact of authorized budget shocks. Moreover, we noted that disbursement performance matters for output growth and efficient fiscal response. The model shows how public capital, when included in firms’ production functions, may act as a double-edged sword. Given a reinvigorated push for infrastructure spending, this note is expected to generate and discuss important policy implications for the Philippines.