Is the Public Investment Multiplier Higher in Developing Countries? An Empirical Investigation

45 Pages Posted: 27 Nov 2019

See all articles by Alejandro Izquierdo

Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department

Ruy Lama

International Monetary Fund (IMF)

Juan Pablo Medina

Central Bank of Chile

Jorge Puig

Universidad Nacional de La Plata

Daniel Riera-Crichton

Bates College

Carlos A. Vegh

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); University of Maryland - Department of Economics; University of California at Los Angeles; National Bureau of Economic Research (NBER)

Guillermo Javier Vuletin

World Bank

Date Written: November 2019

Abstract

Over the last decade, empirical studies analyzing macroeconomic conditions that may affect the size of government spending multipliers have flourished. Yet, in spite of their obvious public policy importance, little is known about public investment multipliers. In particular, the clear theoretical implication that public investment multipliers should be higher (lower) the lower (higher) is the initial stock of public capital has not, to the best of our knowledge, been tested. This paper tackles this empirical challenge and finds robust evidence in favor of the above hypothesis: countries with a low initial stock of public capital (as a proportion of GDP) have significantly higher public investment multipliers than countries with a high initial stock of public capital. This key finding seems robust to the sample (European countries, U.S. states, and Argentine provinces) and identification method (Blanchard-Perotti, forecast errors, and instrumental variables). Our results thus suggest that public investment in developing countries would carry high returns.

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Suggested Citation

Izquierdo, Alejandro and Lama, Ruy and Medina, Juan Pablo and Puig, Jorge and Riera-Crichton, Daniel and Vegh, Carlos A. and Vuletin, Guillermo Javier, Is the Public Investment Multiplier Higher in Developing Countries? An Empirical Investigation (November 2019). NBER Working Paper No. w26478, Available at SSRN: https://ssrn.com/abstract=3492881

Alejandro Izquierdo (Contact Author)

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

Ruy Lama

International Monetary Fund (IMF) ( email )

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

Juan Pablo Medina

Central Bank of Chile ( email )

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Jorge Puig

Universidad Nacional de La Plata ( email )

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Buenos Aires, BA 1900
Argentina

Daniel Riera-Crichton

Bates College ( email )

Lewiston, ME 04240
United States

Carlos A. Vegh

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
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University of Maryland - Department of Economics ( email )

College Park, MD 20742
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University of California at Los Angeles ( email )

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United States
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National Bureau of Economic Research (NBER)

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Guillermo Javier Vuletin

World Bank ( email )

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Washington, DC 20433
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