The Macroeconomic (and Distributional) Effects of Public Investment in Developing Economies, IMF

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Study:  17 October 2017 - 39 Page(s)
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Abstract
This paper provides new empirical evidence of the macroeconomic effects of public
investment in developing economies. Using public investment forecast errors to identify
unanticipated changes in public investment, the paper finds that increased public investment
raises output in the short and medium term, with an average short-term fiscal multiplier of
about 0.2. We find some evidence that the effects are larger: (i) during periods of slack; (ii)
in economies operating with fixed exchange rate regimes; (iii) in more closed economies;
(iv) in countries with lower public debt; and (v) in countries with higher investment
efficiency. Finally, we show that increases in public investment tend to lower income
inequality.