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

48 Pages Posted: 23 Jan 2020

See all articles by Alejandro Izquierdo

Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department

Ruy Lama

International Monetary Fund (IMF)

Juan Medina

Adolfo Ibanez University

Jorge Puig

Universidad Nacional de La Plata

Daniel Riera-Crichton

World Bank

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: December 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 to the identification method (Blanchard-Perotti, forecast errors, and instrumental variables). Our results thus suggest that public investment in developing countries would carry high returns.

Keywords: Public investments, Economic growth, Financial crises, Private investments, Labor force participation, Fiscal multiplier, Public investment, Stock of public capital, Crowding-in, WP, public capital, initial stock, Argentine province, GDP ratio

JEL Classification: E22, E32, E62, E01, O4, L31, H54, G01

Suggested Citation

Izquierdo, Alejandro and Lama, Ruy and Medina, Juan 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 Exploration (December 2019). IMF Working Paper No. 19/289. Available at SSRN: https://ssrn.com/abstract=3524310

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 Medina

Adolfo Ibanez University ( email )

Diagonal Las Torres 2640 Peñaleón
Presidente Errázuriz 3485 Las Condes
Santiago, 794-1169
Chile

Jorge Puig

Universidad Nacional de La Plata ( email )

7 Nº 776
Buenos Aires, BA 1900
Argentina

Daniel Riera-Crichton

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
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
United States

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

University of California at Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States
310-825-7371 (Phone)
310-825-9528 (Fax)

HOME PAGE: http://vegh.sscnet.ucla.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Guillermo Javier Vuletin

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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