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Government consumption and investment: Does the composition of purchases affect the multiplier?

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  • Boehm, Christoph E.

Abstract

A large and conventional class of macroeconomic models predicts that short-lived government investment shocks have a smaller fiscal multiplier than government consumption shocks. I test this prediction in a panel of OECD countries using real-time forecasts of government consumption and investment to purify changes in purchases of their predicted components. Consistent with theory, the estimated government investment multiplier is near zero and the government consumption multiplier approximately 0.8. These findings suggest that fiscal stimulus packages which contain large government investment components may not be as effective at stimulating aggregate demand as commonly thought.

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  • Boehm, Christoph E., 2020. "Government consumption and investment: Does the composition of purchases affect the multiplier?," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 80-93.
    • Handle: RePEc:eee:moneco:v:115:y:2020:i:c:p:80-93
    DOI: 10.1016/j.jmoneco.2019.05.003
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    More about this item

    Keywords

    Fiscal multiplier; Government spending; Government investment;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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