Is the Public Investment Multiplier Higher in Developing Countries? An Empirical Exploration

By Alejandro Izquierdo, Ruy Lama, Juan Pablo Medina, Jorge Puig, Daniel Riera-Crichton, Carlos A. Végh Gramont, Guillermo Javier Vuletin

December 20, 2019

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Alejandro Izquierdo, Ruy Lama, Juan Pablo Medina, Jorge Puig, Daniel Riera-Crichton, Carlos A. Végh Gramont, and Guillermo Javier Vuletin. Is the Public Investment Multiplier Higher in Developing Countries? An Empirical Exploration, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Over the last decade, empirical studies analyzing macroeconomic conditions that may affect the size of government spending multipliers have flourished. Yet, in spite of their obvious public policy importance, little is known about public investment multipliers. In particular, the clear theoretical implication that public investment multipliers should be higher (lower) the lower (higher) is the initial stock of public capital has not, to the best of our knowledge, been tested. This paper tackles this empirical challenge and finds robust evidence in favor of the above hypothesis: countries with a low initial stock of public capital (as a proportion of GDP) have significantly higher public investment multipliers than countries with a high initial stock of public capital. This key finding seems robust to the sample (European countries, U.S. states, and Argentine provinces) and to the identification method (Blanchard-Perotti, forecast errors, and instrumental variables). Our results thus suggest that public investment in developing countries would carry high returns.

Subject: Expenditure, Financial institutions, Government consumption, National accounts, Private investment, Public investment spending, Stocks

Keywords: Crowding-in, Fiscal multiplier, Global, Government consumption, Government spending multiplier, Investment multiplier, Multiplier calculation, Multiplier estimate, Private investment, Public investment, Public investment multiplier, Public investment spending, Stock of public capital, Stocks, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/289
Stock No:

WPIEA2019289
ISBN:

9781513521114
ISSN:

1018-5941

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