Public Investment: Another (Different) Look

IGIER Working Paper No. 277

49 Pages Posted: 30 Dec 2004

See all articles by Roberto Perotti

Roberto Perotti

Bocconi University - Department of Economics; European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR)

Date Written: December 2004

Abstract

Using a structural Vector Autoregression approach, this paper compares the macroeconomic effects of the three main government spending tools: government investment, consumption, and transfers to households, both in terms of the size and the speed of their effects on GDP and its components. Contrary to a common opinion, there is no evidence that government investment shocks are more effective than government consumption shocks in boosting GDP: this is true both in the short and, perhaps more surprisingly, in the long run. In fact, government investment appears to crowd out private investment, especially in dwelling and in machinery and equipment. There is no evidence that government investment "pays for itself" in the long run, as proponents of the "Golden Rule" implicitly or explicitly argue. The positive effects of government consumption itself are rather limited, and defense purchases have even smaller (or negative) effects on GDP and private investment. There is also no evidence that government transfers are more effective than government consumption in stimulating demand.

Suggested Citation

Perotti, Roberto, Public Investment: Another (Different) Look (December 2004). IGIER Working Paper No. 277, Available at SSRN: https://ssrn.com/abstract=637190 or http://dx.doi.org/10.2139/ssrn.637190

Roberto Perotti (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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