This paper provides new empirical evidence of the macroeconomic effects of public investment in developing economies. Using public investment forecast errors to identify unanticipated changes in public investment, the paper finds that increased public investment raises output in the short and medium term, with an average short-term fiscal multiplier of about 0.2. We find some evidence that the effects are larger:
during periods of slack
in economies operating with fixed exchange rate regimes
in more closed economies
in countries with lower public debt
in countries with higher investment efficiency.
Finally, we show that increases in public investment tend to lower income inequality.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Davide Furceri, Bin Grace Li (2017) The Macroeconomic (and Distributional) Effects of Public Investment in Developing Economies. IMF Working Paper No. 17/217
The Macroeconomic (and Distributional) Effects of Public Investment in Developing Economies
Published 20 October 2017