Government Investment and Fiscal Stimulus

BySusan S. Yang, Todd B. Walker, Eric M. Leeper

October 1, 2010

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Effects of government investment are studied in an estimated neoclassical growth model. The analysis focuses on two dimensions that are 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.

Subject: 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

Pages:
30
Volume:
2010
DOI:
https://doi.org/10.5089/9781455208944.001
Issue:
229
Series:
Working Paper No. 2010/229
Stock No:
WPIEA2010229
ISBN:
9781455208944
ISSN:
1018-5941

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