Bridging micro and macro production functions: The fiscal multiplier of infrastructure investment

Research Question

This paper investigates the fiscal multiplier of infrastructure investment, specifically by incorporating firm-level investment decisions — a dimension absent from prior literature. The central analytical challenge is bridging the micro (firm-level) and macro (state-level) production functions for infrastructure, given that public capital is non-rivalrous: it can be used simultaneously by all firms without being depleted. The paper demonstrates that this non-rivalry generates a systematic discrepancy between firm-level and aggregate-level estimates of the elasticity of substitution between private and public capital, and it shows how this discrepancy shapes the magnitude of the fiscal multiplier.

Global Nonlinear Solutions in Sequence Space and the Generalized Transition Function

Real-world economies combine rich cross-sectional heterogeneity with complex nonlinearities – occasionally binding constraints, nontrivial market-clearing conditions – that standard global solution methods struggle to handle together. This paper’s “repeated transition method” (RTM) solves this problem by exploiting the ergodicity of a sufficiently long simulated equilibrium path: since a long enough path eventually revisits states similar to any given one, the RTM identifies matching periods across the simulation and uses their realized outcomes to characterize conditional expectations directly, without ever specifying or fitting a parametric law of motion for the distribution’s moments (the approach of Krusell and Smith 1997, 1998, and subsequent moment-based methods). This “translates [the] expectation-formation problem into the sequence space,” sidesteps the curse of dimensionality that afflicts moment-based state-space approaches, and delivers a computational speedup of “more than tenfold” for models with period-by-period fixed-point problems such as nontrivial market clearing. Building on this global solution, the paper introduces the “generalized transition function” (GTF): a sub-path of the recursive competitive equilibrium that nests both generalized impulse response functions and stochastic growth paths, enabling analysis of state-dependent dynamics and the interaction between short-run growth and uncertainty within one unified, globally-computed object. Applying the RTM and GTF to two heterogeneous-household real-business-cycle models – one with investment irreversibility and fiscal spending shocks, another with portfolio choice – the paper reports five main findings: the economy displays “endogenous fragility,” in which a larger share of hand-to-mouth households makes moderate shocks generate disproportionately severe downturns; uncertainty dampens short-run growth when capital adjustment is irreversible, a channel distinct from the standard investment “wait-and-see” effect; fiscal multipliers vary strongly with the distribution of hand-to-mouth households, confirming the Kaplan-Violante (2014) mechanism within a fully nonlinear equilibrium framework; portfolio adjustment differs starkly across the wealth distribution, with wealth-poor households holding highly leveraged risky positions and rebalancing aggressively, frequently hitting borrowing constraints, unlike wealth-rich households; and the response of the risk premium to a TFP shock is highly state-dependent and can even change sign depending on how wealth is distributed across portfolios. Together these results show that the transmission of fiscal and monetary policy depends crucially on the cross-sectional distribution of households, with direct implications for the timing and design of stabilization policy.

Hanbaek Lee | Macro Paper Warehouse

Bridging micro and macro production functions: The fiscal multiplier of infrastructure investment

Global Nonlinear Solutions in Sequence Space and the Generalized Transition Function