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

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: 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