Government consumption and investment: Does the composition of purchases affect the multiplier?

•Short-lived government investment shocks can be associated with small fiscal multipliers.•Estimates of the government investment multiplier are near zero.•Estimates of the government consumption multiplier are approximately 0.8.•Government investment may not be effective at stimulating aggregate de...

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Bibliographic Details
Published in:Journal of monetary economics 2020-11, Vol.115, p.80-93
Main Author: Boehm, Christoph E.
Format: Article
Language:English
Subjects:
Fiscal multiplier
Government investment
Government spending
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Summary:•Short-lived government investment shocks can be associated with small fiscal multipliers.•Estimates of the government investment multiplier are near zero.•Estimates of the government consumption multiplier are approximately 0.8.•Government investment may not be effective at stimulating aggregate demand. A large and conventional class of macroeconomic models predicts that short-lived government investment shocks have a smaller fiscal multiplier than government consumption shocks. I test this prediction in a panel of OECD countries using real-time forecasts of government consumption and investment to purify changes in purchases of their predicted components. Consistent with theory, the estimated government investment multiplier is near zero and the government consumption multiplier approximately 0.8. These findings suggest that fiscal stimulus packages which contain large government investment components may not be as effective at stimulating aggregate demand as commonly thought.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2019.05.003