IMF Working Papers

Uncertainty and Public Investment Multipliers: The Role of Economic Confidence

Author/Editor:

William Gbohoui

Publication Date:

November 12, 2021

Electronic Access:

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Summary:

This paper investigates how macroeconomic uncertainty affects the fiscal multiplier of public investment. In theory, uncertainty can reduce the multiplier if the private sector becomes more cautious and does not respond to the fiscal stimulus. Conversely, it can increase the fiscal multiplier if public investment shocks improve private agents’ expectations about future economic outlook, and lead to larger private spending. Using the disagreement about GDP forecasts as a proxy for uncertainty, we find that unexpected increases in public investment have larger and longer-lasting effects on output, investment, and employment during periods of high uncertainty, with multipliers above 2, and the larger multipliers are not driven by economic slack. Public investment shocks are also found to boost private sector confidence during heightened uncertainty, driving-up expectations about future economic development which in turn magnify private sector response to the initial stimulus.

Series:

Working Paper No. 2021/272

Subject:

Expenditure Fiscal multipliers Fiscal policy National accounts Private investment Public investment spending

Frequency:

regular