TY - JOUR AU - Leduc, Sylvain AU - Wilson, Daniel TI - Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment JF - National Bureau of Economic Research Working Paper Series VL - No. 18042 PY - 2012 Y2 - May 2012 DO - 10.3386/w18042 UR - http://www.nber.org/papers/w18042 L1 - http://www.nber.org/papers/w18042.pdf N1 - Author contact info: Sylvain Leduc Federal Reserve Bank of San Francisco 101 Market St. San Francisco, CA 94105 Tel: 4159743059 Fax: 4159742168 E-Mail: sylvain.leduc@sf.frb.org Daniel Wilson Federal Reserve Bank of San Francisco 101 Market St. Mail Stop 1130 San Francisco, CA 94105-1530 Tel: 415-974-3423 Fax: 415-974-2168 E-Mail: Daniel.Wilson@sf.frb.org M1 - published as Sylvain Leduc, Daniel Wilson. "Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment," in Daron Acemoglu, Jonathan Parker, and Michael Woodford, editors, "NBER Macroeconomics Annual 2012, Volume 27" University of Chicago Press (2013) M3 - presented at "27th Annual Conference on Macroeconomics", April 20-21, 2012 AB - 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 has a positive effect on local GDP both on impact and after 6 to 8 years, with the impact effect coming from shocks during (local) recessions. However, we find no permanent effect (as of 10 years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. The transmission channel for these responses appears to be 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 the presence of productive public capital in this model can yield impulse responses with the same qualitative pattern that we find empirically. ER -