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Can an Increase in Public Investment Sustainably Lift Economic Growth?

Author

Listed:
  • Annabelle Mourougane
  • Jarmila Botev
  • Jean-Marc Fournier
  • Nigel Pain
  • Elena Rusticelli

Abstract

This paper seeks to identify the conditions under which raising public investment can sustainably lift growth without deteriorating public finances. To do so, it relies on a range of simulations using three different macro-structural models. According to the simulations, OECD governments could finance a ½ percentage point of GDP investment-led stimulus for three to four years on average in OECD countries without raising the debt-to-GDP ratio in the medium term, provided projects are sound. After one year, the average output gains for the large advanced economies of such a stimulus amount to 0.4-0.6%. However, the gains are particularly uncertain for Japan. Reprioritising spending in later years would lead to average long-term output gains of between 0.5 to 2% in the large advanced economies. Those gains depend on the assumptions made on the rate of return. Hysteresis reinforces the case for an investment-led stimulus. Output gains will also be higher if the stimulus is combined with structural reforms and if countries act collectively. Une augmentation de l'investissement public peut-elle durablement augmenter la croissance? Ce document de travail cherche à déterminer les conditions dans lesquelles l'augmentation de l'investissement public peut soutenir la croissance durablement sans détériorer les finances publiques. Pour ce faire, il s'appuie sur une série de simulations utilisant trois modèles macro-structurels différents. Selon les simulations, les gouvernements des pays de l'OCDE pourraient financer une augmentation de l'investissement de ½ point de PIB pendant trois à quatre ans en moyenne dans les pays de l'OCDE sans augmenter le ratio dette sur PIB à moyen terme, à condition que les projets soient de bonne qualité. Après un an, les gains moyens de production pour les grandes économies avancées d'un tel stimulus s'élèvent à 0,4-0,6%. Cependant, ces gains sont particulièrement incertains pour le Japon. Une réallocation des dépenses vers celles qui sont les plus productives les années suivantes, se traduirait par des gains moyens à long terme de production entre 0,5 et 2% dans les grandes économies avancées. Ces gains dépendent des hypothèses retenues sur le taux de rendement. Les effets d'hystérésis renforcent l'argument en faveur d'une augmentation de l'investissement public. Les gains de production seront également plus élevés si le stimulus est combiné à des réformes structurelles et si les pays agissent collectivement.

Suggested Citation

  • Annabelle Mourougane & Jarmila Botev & Jean-Marc Fournier & Nigel Pain & Elena Rusticelli, 2016. "Can an Increase in Public Investment Sustainably Lift Economic Growth?," OECD Economics Department Working Papers 1351, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:1351-en
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    File URL: http://dx.doi.org/10.1787/a25a7723-en
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    References listed on IDEAS

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    3. repec:oup:cesifo:v:63:y:2017:i:3:p:295-316. is not listed on IDEAS
    4. repec:vrn:journl:y:2017:i:3:p:281-290 is not listed on IDEAS
    5. repec:sae:niesru:v:244:y:2018:i:1:p:r15-r20 is not listed on IDEAS
    6. repec:eee:rujoec:v:3:y:2017:i:3:p:221-239 is not listed on IDEAS

    More about this item

    Keywords

    fiscal multiplier; public debt; public investment;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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