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How large is the Government Spending Multiplier? Evidence from World Bank Lending

Listed author(s):
  • Aart Kraay

    (Development Research Group, The World Bank)

This article proposes a novel approach to empirically identifying government spending multipliers that relies on two features unique to many low-income countries: (1) borrowing from the World Bank finances a substantial fraction of government spending, and (2) spending on World Bank--financed projects is typically spread out over several years following the original approval of the project. The first fact means that fluctuations in spending on World Bank--financed projects are a significant source of fluctuations in overall government spending in these countries. The second fact means that fluctuations in World Bank--financed spending in a given year are largely determined by fluctuations in project approval decisions made in previous years, and so are unlikely to be correlated with shocks to output in the current year. I use World Bank project-level disbursement data to isolate the component of World Bank--financed government spending in a given year that is associated with past project approval decisions. I use this as an instrument for total government spending to estimate multipliers in a sample of 29 primarily low-income countries where variation in government spending from this source is large relative to the size of the economy. The resulting spending multipliers are small and reasonably precisely estimated to be in the vicinity of 0.5. Copyright 2012, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/qje/qjs008
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Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 127 (2012)
Issue (Month): 2 ()
Pages: 829-887

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Handle: RePEc:oup:qjecon:v:127:y:2012:i:2:p:829-887
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  1. Eric M. Leeper, 2010. "Monetary science, fiscal alchemy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 361-434.
  2. Karel Mertens & MortenO. Ravn, 2010. "Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach," Economic Journal, Royal Economic Society, vol. 120(544), pages 393-413, May.
  3. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  4. Lauren Cohen & Joshua D. Coval & Christopher Malloy, 2010. "Do Powerful Politicians Cause Corporate Downsizing?," NBER Working Papers 15839, National Bureau of Economic Research, Inc.
  5. Eric Leeper & Todd B. Walker & Susan Shu-Chun Yang, 2009. "Government Investment And Fiscal Stimulus In The Short And Long Runs," Caepr Working Papers 2009-011, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  6. Leeper, Eric M. & Walker, Todd B. & Yang, Shu-Chun S., 2010. "Government investment and fiscal stimulus," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1000-1012, November.
  7. Price V. Fishback & Valentina Kachanovskaya, 2010. "In Search of the Multiplier for Federal Spending in the States During the Great Depression," NBER Working Papers 16561, National Bureau of Economic Research, Inc.
  8. Robert E. Hall, 2009. "By How Much Does GDP Rise If the Government Buys More Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
  9. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  10. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
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