Green Public Spending Shocks: Composition Effects and State-Dependent Heterogeneity Across Countries

Joao Jalles, John Beirne and Donghyun Park ()
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Donghyun Park: The South East Asian Central Banks (SEACEN) Research and Training Centre

Working Papers from South East Asian Central Banks (SEACEN) Research and Training Centre

Abstract: We quantify “green fiscal multipliers†by constructing country-specific, residual-based shocks to environmental protection outlays (COFOG) and tracing their effects on macroeconomic and environmental outcomes in a multi-country panel. Reduced-form estimates imply that an unexpected 1-pp-of-GDP increase in environmental spending lowers contemporaneous real GDP per-capita growth by about 2.6 pp globally; IV estimates are larger in magnitude (≈–4 pp globally; ≈–7 pp in EMDEs). Local projections show a small short-run dip that troughs around year 2 at –0.05% and fades thereafter, with mild medium-run rebound. Heterogeneity is pronounced: EMDEs drive the near-term contraction; effects are more negative at high public debt and in surplus/open economies and are mitigated where adaptive capacity (ND-GAIN readiness) is high. The findings imply that green fiscal policy should be carefully sequenced and tailored to country conditions to manage short-term costs while maximising long-term benefits. For central banks, green fiscal expansions should be incorporated into the assessment of the effectiveness and transmission of monetary policy. Accounting for their scale, timing, and country-specific conditions can help to minimise the risk of policy miscalibration and support price and financial stability during the transition to a low-carbon economy.

Keywords: Environmental protection spending; green fiscal multipliers; residual-based shocks; local projections; state dependence; EMDE vs AE (search for similar items in EconPapers)
JEL-codes: C23 E32 E62 O44 Q58 (search for similar items in EconPapers)
Date: 2026-09
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