Real and Monetary Determinants of State and Local Highway Investment, 1951-66.

The paper is divided into two parts. In Part I, a stock adjustment model with a variable adjustment coefficient is set up to explain state and local government investment. The empirical findings are discussed in Part II. Why does a given actual interest rate cause a municipal borrower to postpone a bond sale at one time and not to postpone it at another time? The search for an answer to this question led to the hypothesis that the timing of state and local government capital outlays depends on the difference between the actual and the expected interest rate. If the interest rate prevailing at the time bonds are to be marketed is what the finance officer expected it to be, he will carry out authorized expenditures without change. But if the rate is higher than expected, he may delay the expenditure of authorized funds. Expectations change over time, providing an explanation of the different attitudes toward the same actual interest rate. This hypothesis can be formalized in a stock adjustment model in which the adjustment coefficient varies with the difference between the actual and the expected interest rate. The research findings reported in this paper flow from an attempt to use such a model to explain state and local government capital outlays for highways from 1951 through 1966.