Fiscal policy and public debt: Government investment is most effective to promote sustainability

Giovanna Ciaffi, Matteo Deleidi and Lorenzo Di Domenico

Journal of Policy Modeling, 2024, vol. 46, issue 6, 1186-1209

Abstract: This paper aims to quantify the effects of government expenditure and its components, i.e. government consumption and investment, on output and public debt sustainability. The Local Projections approach is applied to a dataset of 14 OECD countries considered for the 1981–2017 period. Fiscal policy shocks have been identified using the Blanchard and Perotti strategy and the narrative approach based on fiscal consolidation episodes. Multipliers of total government spending are above the unit and government investment multipliers are higher than consumption ones. Although all fiscal policy shocks reduce the public debt-to-GDP ratio, government investment is the most effective tool for promoting public debt sustainability.

Keywords: Fiscal multipliers; Public debt sustainability; Government consumption and investment; Local Projections; OECD Countries (search for similar items in EconPapers)
JEL-codes: C33 E62 H50 H60 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:46:y:2024:i:6:p:1186-1209

DOI: 10.1016/j.jpolmod.2024.07.002

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