Uncertainty and Public Investment Multipliers: The Role of Economic Confidence

November 12, 2021

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William Gbohoui. Uncertainty and Public Investment Multipliers: The Role of Economic Confidence, (USA: International Monetary Fund, 2021) accessed October 6, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Expenditure, Fiscal multipliers, Fiscal policy, National accounts, Private investment, Public investment spending

Keywords: Corporate balance sheet., Fiscal multipliers, Global, Investment multiplier, Investment shock, Macroeconomic uncertainty, Private investment, Private sector confidence, Private sector response, Public investment, Public investment spending

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/272
Stock No:

WPIEA2021272
ISBN:

9781616356200
ISSN:

1018-5941

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