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What Have We Learned about the Effectiveness of Infrastructure Investment as a FiscalStimulus ? A Literature Review

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  • Vagliasindi,Maria
  • Gorgulu,Nisan

Abstract

Since the Great Depression of the 1930s, and through the more recent Asian Crisis of 1997 andGreat Recession of 2008/09, governments have experimented with Keynesian style fiscal stimulus to support employmentand accelerate economic recovery. The effectiveness of these policies depends on the size of fiscal multipliers. A largebody of economic literature has estimated such multipliers, with gradually increasing precision, due to econometricimprovements and better ways to identify fiscal impulses. Overall, the largest multipliers are found to be associatedwith public investment, as opposed to other types of spending. Such public investment multipliers are typicallybelow one in the short run, but studies with multi-year horizons suggest that values higher than unity can beattained over time. The size of multipliers is sensitive to economic conditions. During recessions, and periods of highunemployment, transfer payments appear sometimes to offer higher multipliers than public investment. An importantexception is when fiscal and monetary policies are closely coordinated and interest rates approach zero, conditionsthat provide the strongest evidence for the efficacy of public investment multipliers. Other institutional factorsalso play a crucial role in determining the size of the public investment multiplier, in particular the country’sabsorptive capacity, and the selection of high-quality shovel ready projects. However, there is limited empiricalevidence available on the magnitude of fiscal multipliers in developing country settings, or for infrastructure sectorsor subsectors specifically. The few studies available suggest that certain types of green infrastructure (energyefficiency, solar energy, and so forth) may bring employment benefits in the short run, while innovative digitalinfrastructure may yield longer-run benefits for economic growth. The relevance of these findings to the currentCOVID-19 crisis is explored.

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  • Vagliasindi,Maria & Gorgulu,Nisan, 2021. "What Have We Learned about the Effectiveness of Infrastructure Investment as a FiscalStimulus ? A Literature Review," Policy Research Working Paper Series 9796, The World Bank.
    • Handle: RePEc:wbk:wbrwps:9796
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