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A model-based analysis of the effect of increased public investment

Published online by Cambridge University Press:  01 January 2020

Nigel Pain ,
Elena Rusticelli ,
Véronique Salins  and
David Turner
David Turner*
Affiliation:
OECD Economics department
*
Corresponding author: David.TURNER@oecd.org
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Abstract

There is a strong case for boosting public investment in many countries based on identified country-specific structural weaknesses and the relatively low levels of such investment. This paper analyses the potential macroeconomic benefits of increased public investment using simulations on NiGEM. The results suggest that the supply-side benefits from raising potential output are likely to lead to more favourable macroeconomic outcomes than those from using many other standard fiscal instruments, although it takes many years for the full effect on potential output to accumulate. Variant model simulations also suggest that a fiscal stimulus will be more effective in the short term the less it is offset by monetary policy, making well-targeted policy initiatives especially effective when policy interest rates are at the zero lower bound. Globalisation implies that spillover effects from collective action are larger than in the past, boosting multipliers relative to the case where countries take individual action, particularly in the first two years after the policy change. Such spillovers are likely to be particularly important in small open European economies, especially those strongly integrated in European value chains.

Keywords

public investmentfiscal multiplierspilloversmacroeconomic modelC5E6
Type
Research Articles
Information
National Institute Economic Review , Volume 244 , May 2018 , pp. R15 - R20
Copyright
Copyright © 2018 National Institute of Economic and Social Research

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Footnotes

The views in this paper should not be reported as representing the official views of the OECD or of its member countries. The opinions expressed and arguments employed are those of the authors.

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