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An Estimation and Decomposition of the Government Investment Multiplier

Author

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  • Marius Clemens
  • Claus Michelsen
  • Malte Rieth

Abstract

We construct a narrative instrument for government investment from official records in Germany. Using structural vector autoregressions, we document a significant crowding-in of private investment and an output multiplier of roughly 2. Then, we match a New Keynesian dynamic stochastic general equilibrium model to the empirical responses, and we decompose the multiplier into three channels. Public investment reduces private investment costs in the short run, it increases the production capacity in the medium run, and it generates demand effects along the production network. We find a similar multiplier in other euro area countries, using an indirect instrumental variable strategy.

Suggested Citation

  • Marius Clemens & Claus Michelsen & Malte Rieth, 2025. "An Estimation and Decomposition of the Government Investment Multiplier," Discussion Papers of DIW Berlin 2106, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp2106
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    References listed on IDEAS

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    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    2. Roel Beetsma & Massimo Giuliodori, 2011. "The Effects of Government Purchases Shocks: Review and Estimates for the EU," Economic Journal, Royal Economic Society, vol. 121(550), pages 4-32, February.
    3. Eric M. Leeper & Todd B. Walker & Shu‐Chun Susan Yang, 2013. "Fiscal Foresight and Information Flows," Econometrica, Econometric Society, vol. 81(3), pages 1115-1145, May.
    4. Carsten Jentsch & Kurt G. Lunsford, 2019. "The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Comment," American Economic Review, American Economic Association, vol. 109(7), pages 2655-2678, July.
    5. Valerie A. Ramey & Sarah Zubairy, 2018. "Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 850-901.
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    Cited by:

    1. Schmidt, Torsten & Blagov, Boris & Coschignano, Eliana & Dirks, Maximilian & Grozea-Helmenstein, Daniela & Isaak, Niklas & Kirsch, Florian & Krause, Clara & Kotz, Stefan & Schacht-Picozzi, Philip & We, 2025. "Frühjahr 2025: Deutsche Wirtschaft weiter im Leerlauf," RWI Konjunkturberichte, RWI - Leibniz-Institut für Wirtschaftsforschung, vol. 76, pages 1-40.
    2. Fichtner Ferdinand & Junker Simon & Michelsen Claus, 2025. "Zur Bundestagswahl: Wie die Parteien die Investitionstätigkeit ankurbeln wollen," Wirtschaftsdienst, Sciendo, vol. 105(2), pages 104-111.

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    More about this item

    Keywords

    Fiscal policy; public investment; structural vector autoregression; instrumental variable; general equilibrium model; Germany;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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