Governmentally amplified output volatility

Abstract

Predominant government behavior is decomposed by frequency into several periodic components: updating cycles of infrastructure, Kuznets cycles, fiscal policy over business cycles, and election cycles. Little is known, however, about the theoretical impact of such cyclical behavior in public finance on output fluctuations. Based on a standard neoclassical growth model, this study intends to examine the frequency at which public investment cycles are relevant to output fluctuations. We find an inverted U-shaped relationship between output volatility and length of cycle in public investment. Moreover, with a numerical setting, we show that periodic behavior in public investment at low frequencies-such as updating cycles of infrastructure and Kuznets cycles-can cause aggravated output resonance.