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Do Public Investments Increase Employment in a Recession? Evidence from Germany

  • Buchheim, Lukas
  • Watzinger, Martin
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    In 2009, Germany invested 15.4 Billion Euro in infrastructure to avert the looming recession. In this study, we evaluate whether the German stimulus program was successful in limiting the impact of the crisis on the job market. We exploit exogenous cross-sectional variation to identify the casual effect of stimulus investment on the change in unemployment on the county level. By law, 65 percent of the stimulus funds were earmarked for the renovation of existing school buildings. Thus a large part of all investment was predetermined by the number and size of schools in a county which are plausibly exogenous to local economic conditions. Thus a large part of all investment was predetermined by the number and size of schools in a county which are plausibly exogenous to local economic conditions during the crisis. This opens up the possibility to use the number of schools and students as instrumental variables for stimulus investment. Our IV-estimates indicate that the stimulus program was successful in reducing the number of unemployed: On average, one job was created for every 44,000 Euro spent. This result is in line with estimates for the effectiveness of the US stimulus program. We validate our IV strategy with extensive falsification exercises and various robustness checks.

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    File URL: http://econstor.eu/bitstream/10419/79826/1/VfS_2013_pid_279.pdf
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    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79826.

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    Date of creation: 2013
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    Handle: RePEc:zbw:vfsc13:79826
    Contact details of provider: Web page: http://www.socialpolitik.org/
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    1. Daniel J. Wilson, 2012. "Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 251-82, August.
    2. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98 National Bureau of Economic Research, Inc.
    3. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
    4. Antonio Acconcia & Giancarlo Corsetti & Saverio Simonelli, 2011. "Mafia and Public Spending: Evidence on the Fiscal Multiplier from a Quasi-experiment," CSEF Working Papers 281, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 04 Feb 2013.
    5. Clemens, Jeffrey & Miran, Stephen, 2010. "The effects of state budget cuts on employment and income," MPRA Paper 38715, University Library of Munich, Germany.
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