Government Investment and Fiscal Stimulus
IMF Working Papers, October 1, 2010
Source details
- Canonical URL
- Government Investment and Fiscal Stimulus
Other formats
Bibliographic details
- Authors: Susan S. Yang, Todd B. Walker, Eric M. Leeper
- Published: October 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455208944.001
Summary
- Effects of government investment are studied in an estimated neoclassical growth model.
- The analysis focuses on two dimensions critical for understanding government investment as a fiscal stimulus:
- implementation delays for building public capital; and
- expected fiscal adjustments to deficit-financed spending.
- Implementation delays can produce small or even negative labor and output responses to increases in government investment in the short run.
- Anticipated fiscal adjustments matter both quantitatively and qualitatively for long-run growth effects.
- When public capital is insufficiently productive, distorting financing can make government investment contractionary at longer horizons.
Key findings and mechanisms
- Implementation delays:
- Can lead to small or negative short-run responses in labor and output following increases in government investment.
- Anticipated fiscal adjustments:
- Shape both the magnitude and the sign of long-run growth effects from government investment.
- Public capital productivity and financing:
- If public capital is insufficiently productive, financing that distorts the economy can render government investment contractionary over longer horizons.
Policy implications and considerations
- Timing and implementation:
- Delays in building public capital reduce the short-run stimulative effect of government investment and can even cause negative short-run outcomes for labor and output.
- Fiscal financing and adjustment strategy:
- The expected path of fiscal consolidation or adjustment following deficit-financed investment is crucial for long-run outcomes.
- Policymakers should consider the productivity of public capital and the distortionary effects of financing when designing investment-based stimulus.
- Evaluation of investment projects:
- Assess public capital productivity carefully; insufficient productivity combined with distorting financing may worsen long-run growth.
Publication and metadata
- Authors: Susan S. Yang, Todd B. Walker, Eric M. Leeper
- Date: October 1, 2010
- Pages: 30
- Series: Working Paper No. 2010/229
- Volume: 2010
- Issue: 229
- DOI: https://doi.org/10.5089/9781455208944.001
- Stock No: WPIEA2010229
- ISBN: 9781455208944
- ISSN: 1018-5941
- Subjects: Capital productivity, Expenditure, Fiscal consolidation, Fiscal policy, Government consumption, National accounts, Production, Public investment spending
- Keywords: Capital productivity, consumption multiplier, depreciation rate, DGSE Bayesian Estimation, Fiscal consolidation, fiscal stimulus, Government consumption, government investment, government investment project, government investment shock, government spending multiplier, implementation delays, investment multiplier, multiplier change, output multiplier, present-value investment multiplier, Public investment spending, wealth effect, WP
IMF Working Paper: "Government Investment and Fiscal Stimulus" (Susan S. Yang, Todd B. Walker, Eric M. Leeper), Working Paper No. 2010/229, October 1, 2010.