How Large is the Government Spending Multiplier? Evidence from World Bank Lending

46 Pages Posted: 20 Apr 2016

See all articles by Aart Kraay

Aart Kraay

World Bank - Development Research Group (DECRG)

Date Written: December 1, 2010

Abstract

This paper proposes a novel method of isolating fluctuations in public spending that are likely to be uncorrelated with contemporaneous macroeconomic shocks and can be used to estimate government spending multipliers. The approach relies on two features unique to many low-income countries: (1) borrowing from the World Bank finances a substantial fraction of public spending, and (2) actual spending on World Bank-financed projects is typically spread out over several years following the original approval of the project. These two features imply that fluctuations in spending on World Bank projects in a given year are in large part determined by fluctuations in project approval decisions made in previous years, and so are unlikely to be correlated with shocks to output in the current year. World Bank project-level disbursement data are used to isolate the component of public spending associated with project approvals from previous years, which in turn can be used to estimate government spending multipliers, in a sample of 29 aid-dependent low-income countries. The estimated multipliers are small, reasonably precisely estimated, and rarely significantly different from zero.

Keywords: Debt Markets, Public Sector Economics, Banks & Banking Reform, Urban Economics, Economic Stabilization

Suggested Citation

Kraay, Aart, How Large is the Government Spending Multiplier? Evidence from World Bank Lending (December 1, 2010). World Bank Policy Research Working Paper No. 5500. Available at SSRN: https://ssrn.com/abstract=1726249

Aart Kraay (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

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HOME PAGE: http://econ.worldbank.org/staff/akraay

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