Is the Public Investment Multiplier Higher in Developing Countries? An Empirical Exploration

IMF Working Papers, December 20, 2019

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Authors: Alejandro Izquierdo, Ruy Lama, Juan Pablo Medina, Jorge Puig, Daniel Riera-Crichton, Carlos A. Végh Gramont, Guillermo Javier Vuletin
Published: December 20, 2019
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781513521114.001

Over the last decade, empirical studies analyzing macroeconomic conditions that may affect the size of government spending multipliers have flourished; however, little is known about public investment multipliers.
The paper tests the theoretical implication that public investment multipliers should be higher (lower) the lower (higher) is the initial stock of public capital.
Key empirical finding: countries with a low initial stock of public capital (as a proportion of GDP) have significantly higher public investment multipliers than countries with a high initial stock of public capital.
The key finding is robust across samples and identification methods.

Samples analyzed:
- European countries
- U.S. states
- Argentine provinces
Identification methods used:
- Blanchard-Perotti
- Forecast errors
- Instrumental variables

The results suggest that public investment in developing countries would carry high returns.
Implicit policy recommendation: prioritizing public investment where the initial stock of public capital (as a proportion of GDP) is low could yield larger output multipliers.