Revisiting Public Investment Multipliers: Nonlinear Effects of the Business Cycle, Fiscal Space, Efficiency, and Capital Stock

Amat Adarov, Benedict Clements and Joao Jalles

No 10954, Policy Research Working Paper Series from The World Bank

Abstract: The paper examines the macroeconomic effects of public investment in emerging market and developing economies. To this end, the analysis develops a new measure of public investment shocks based on cyclically adjusted government investment. Estimations using local projections based on a large sample of 129 countries over 1980–2019 suggest that public investment can significantly boost economic growth: an increase in public investment by 1 percent of gross domestic product raises output by 1.1 percent after five years, on average. However, the effects are much larger when public investment spending is efficient and fiscal space is ample—reaching up to 1.6 percent over the same period. Public investment multipliers tend to be larger during recessions and in capital-scarce economies. The paper also finds that public investment can crowd in private investment, as well as boost productivity and potential output.

Date: 2024-10-22
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