The Macroeconomic (and Distributional) Effects of Public Investment in Developing Economies

40 Pages Posted: 8 Nov 2017

See all articles by Davide Furceri

Davide Furceri

International Monetary Fund (IMF)

Bin (Grace) Li

International Monetary Fund

Date Written: October 2017

Abstract

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: (i) during periods of slack; (ii) in economies operating with fixed exchange rate regimes; (iii) in more closed economies; (iv) in countries with lower public debt; and (v) in countries with higher investment efficiency. Finally, we show that increases in public investment tend to lower income inequality.

Keywords: Fiscal policy, Public investment, Growth, Inequality, Demand and Supply, Energy and the Macroeconomy, Government Policy

JEL Classification: E32, D84, F02, Q41, Q43, Q48

Suggested Citation

Furceri, Davide and Li, Bin (Grace), The Macroeconomic (and Distributional) Effects of Public Investment in Developing Economies (October 2017). IMF Working Paper No. 17/217, Available at SSRN: https://ssrn.com/abstract=3067269

Davide Furceri (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Bin (Grace) Li

International Monetary Fund ( email )

700 19th Street NW
Washington, DC 20431
United States

HOME PAGE: http://binli.economics.googlepages.com/

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