Public investment multipliers revisited: the role of production complementarities

Vasiliki Dimakopoulou, George Economides and Apostolis Philippopoulos

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper revisits the issue of the public investment multiplier through the lens of complementarity or substitutability between private inputs and public infrastructure capital. Our main result is that public investment multipliers are much larger than in the literature when private inputs and public capital are good complements relative to the canonical Cobb–Douglas case where the degree of complementarity is unity, and, at the same time, public capital is in relative shortage, meaning that it acts as a ‘weak link’ in production. Within this framework, the stronger the degree of complementarity (respectively substitutability), the larger (respectively smaller) the size of the multiplier. The model is solved numerically by choosing its parameters according to UK data. The model's positive and normative implications are then compared to current values of policy variables in the UK economy.

Keywords: fiscal policy; firm behaviour; production (search for similar items in EconPapers)
JEL-codes: D21 E23 E62 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2026-02-13
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Published in Economica, 13, February, 2026. ISSN: 0013-0427

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:137387

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