The Macroeconomic Effects of Public Investment: Evidence from Advanced Economies

27 Pages Posted: 2 Jun 2015

See all articles by Abdul G. Abiad

Abdul G. Abiad

International Monetary Fund (IMF) - Research Department

Davide Furceri

International Monetary Fund (IMF)

Petia B. Topalova

International Monetary Fund (IMF)

Date Written: May 2015

Abstract

This paper provides new evidence of the macroeconomic effects of public investment in advanced economies. Using public investment forecast errors to identify the causal effect of government investment in a sample of 17 OECD economies since 1985 and model simulations, the paper finds that increased public investment raises output, both in the short term and in the long term, crowds in private investment, and reduces unemployment. Several factors shape the macroeconomic effects of public investment. When there is economic slack and monetary accommodation, demand effects are stronger, and the public-debt-to-GDP ratio may actually decline. Public investment is also more effective in boosting output in countries with higher public investment efficiency and when it is financed by issuing debt.

Keywords: Public investment, Infrastructure, Developed countries, OECD, Econometric models, Time series, Fiscal policy, Growth, Debt., private investment, capital, investment spending, interest, interest rates, government investment

JEL Classification: E32, D84, F02, Q41, Q43, Q48

Suggested Citation

Abiad, Abdul G. and Furceri, Davide and Topalova, Petia B., The Macroeconomic Effects of Public Investment: Evidence from Advanced Economies (May 2015). IMF Working Paper No. 15/95. Available at SSRN: https://ssrn.com/abstract=2613305

Abdul G. Abiad (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Davide Furceri

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Petia B. Topalova

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

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