Revisiting Public Investment Multipliers: Nonlinear Effects of the Business Cycle, Fiscal Space, Efficiency, and Capital Stock
Introduction
Public investment is often seen as a potent tool for fostering economic growth, particularly in emerging market and developing economies (EMDEs). Despite this, public investment can have varying impacts depending on factors such as fiscal space, efficiency, and the state of the business cycle. The empirical estimates of public investment multipliers can differ significantly due to differences in sample selection, estimation methods, and the inclusion of nonlinear effects.
Key Findings
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Public Investment Multipliers: An increase in public investment by 1% of GDP raises output by 1.1% after five years on average. This effect can be amplified to 1.6% in countries with higher public investment efficiency and ample fiscal space.
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Business Cycle and Fiscal Space: Public investment multipliers tend to be larger during recessions and in capital-scarce economies. Fiscal space plays a crucial role in magnifying these effects.
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Efficiency and Capital Stock: Public investment efficiency and the initial public capital stock level are critical determinants of the multiplier effect. Countries with higher efficiency and adequate fiscal space see more significant boosts in output.
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Crowding-In Effects: Public investment can also stimulate private investment, potentially leading to increased productivity and potential output. This is especially true in EMDEs where scaling up public investment can have significant positive effects.
Methodology
- Sample: The analysis uses data from 129 EMDEs over the period 1980-2019.
- Shock Identification: A new approach based on cyclically adjusted real public investment was developed to identify public investment shocks.
- Local Projections: Local projections were used to estimate the effects of public investment on output, private investment, productivity, and potential output.
Results
- Output Growth: A 1% increase in public investment leads to a 1.1% increase in output after five years on average.
- Multiplier Effects: In countries with higher public investment efficiency and ample fiscal space, a 1% increase in public investment can lead to a 1.6% increase in output over five years.
- Negative Effects: In countries with low public investment efficiency and high public debt, the output effects of public investment are smaller and not statistically significant.
Conclusion
The study highlights the importance of public investment in fostering economic growth, especially in EMDEs. The results underscore the need for efficient public investment and sufficient fiscal space to maximize the multiplier effect. Additionally, public investment can have significant positive effects on private investment, productivity, and potential output, making it a valuable tool for economic development.
