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

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  • Alejandro Izquierdo
  • Ruy E. Lama
  • Juan Pablo Medina
  • Jorge P. Puig
  • Daniel Riera-Crichton
  • Carlos A. Vegh
  • Guillermo Vuletin

Abstract

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 identification method (Blanchard-Perotti, forecast errors, and instrumental variables). Our results thus suggest that public investment in developing countries would carry high returns.

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  • Alejandro Izquierdo & Ruy E. Lama & Juan Pablo Medina & Jorge P. Puig & Daniel Riera-Crichton & Carlos A. Vegh & Guillermo Vuletin, 2019. "Is the Public Investment Multiplier Higher in Developing Countries? An Empirical Investigation," NBER Working Papers 26478, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26478
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    5. Vybhavi Balasundharam & Olivier Basdevant & Dalmacio Benicio & Andrew Ceber & Yujin Kim & Luca Mazzone & Hoda Selim & Yongzheng Yang, 2023. "Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design," IMF Working Papers 2023/063, International Monetary Fund.
    6. Ardanaz, Martín & Cavallo, Eduardo & Izquierdo, Alejandro & Puig, Jorge, 2021. "Growth-friendly fiscal rules? Safeguarding public investment from budget cuts through fiscal rule design," Journal of International Money and Finance, Elsevier, vol. 111(C).
    7. Tamon Asonuma & Hyungseok Joo, 2021. "Public Capital and Fiscal Constraint in Sovereign Debt Crises," School of Economics Discussion Papers 0621, School of Economics, University of Surrey.
    8. Marina da Silva Sanches & Laura Barbosa de Carvalho, 2023. "Multiplier effects of social protection: a SVAR approach for Brazil," International Review of Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 93-112, January.
    9. Cusato Novelli, Antonio & Barcia, Giancarlo, 2021. "Sovereign Risk, Public Investment and the Fiscal Policy Stance," Journal of Macroeconomics, Elsevier, vol. 67(C).
    10. Victor Yotzov & Garabed Minassian & Pobeda Loukanova & Dimitar Zlatinov & Grigor Sariiski, 2022. "Bulgaria's economy during the pandemic," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 121-149.
    11. Thibault Lemaire, 2020. "Fiscal Consolidations and Informality in Latin America and the Caribbean," Post-Print halshs-02492309, HAL.
    12. Anzoategui, Diego, 2022. "Sovereign spreads and the effects of fiscal austerity," Journal of International Economics, Elsevier, vol. 139(C).
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    14. Jalles, João Tovar & Park , Donghyun & Qureshi, Irfan, 2024. "Public versus Private Investment Multipliers in Emerging Market and Developing Economies: Cross-Country Analysis with a Focus on Asia," ADB Economics Working Paper Series 737, Asian Development Bank.
    15. Tannous Kass-Hanna & Julien Reynaud & Chris Walker, 2023. "Estimating Fiscal Multipliers Under Alternative Exchange Rate Regimes: The Case of Bolivia," IMF Working Papers 2023/240, International Monetary Fund.
    16. García-Albán, Freddy & González-Astudillo, Manuel & Vera-Avellán, Cristhian, 2021. "Good policy or good luck? Analyzing the effects of fiscal policy and oil revenue shocks in Ecuador," Energy Economics, Elsevier, vol. 100(C).
    17. Giovanna Ciaffi & Matteo Deleidi & Enrico Sergio Levrero, 2022. "The Macroeconomic Impact of Public Spending in Research and Development: An Initial Exploration for G7 and 15 Oecd Countries," Bulletin of Political Economy, Bulletin of Political Economy, vol. 16(1), pages 1-19, June.
    18. Ardanaz, Martín & Cavallo, Eduardo A. & Izquierdo, Alejandro & Puig, Jorge, 2021. "The Output Effects of Fiscal Consolidations: Does Spending Composition Matter?," IDB Publications (Working Papers) 11857, Inter-American Development Bank.

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • 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

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