Title: The marginal product of private and public capital
Authors: Alvar Kangur - International Monetary Fund (United States) [presenting]
Francesco Grigoli - International Monetary Fund (United States)
Peter Pedroni - Williams College (United States)
Abstract: Nonlinearities in private and public capital in determining the level of output are explored. Relying on a new dataset spanning 150 countries over more than three decades and a recently developed methodology, we draw conclusions on the optimal level of capital and therefore on the extent to which countries over- or under-invest. By reinterpreting the relationship between capital stocks and income levels in terms of marginal effects, we uncover nonlinearities in the marginal productivity of capital at different levels of capital stocks and analyze how they evolved over time. Furthermore, interacting the nonlinear relationship with theoretically complementary factors, such as quality of institutions, efficiency of public investment, proxies for international credit frictions, among others, we identify conditions that are conducive to higher marginal productivity of capital and consequently to endogenous growth. Finally, we also draw implications on reasons why capital does not flow from rich to poor countries where capital ratios are lower.