What have we Learned about the Effectiveness of Infrastructure Investment as a Fiscal Stimulus? A Literature Review

Maria Vagliasindi, Nisan Gorgulu

Research output: Working paperResearchpeer-review

Abstract

Since the Great Depression of the 1930s, and through the more recent Asian Crisis of 1997 and Great Recession of 2008/09, governments have experimented with Keynesian style fiscal stimulus to support employment and accelerate economic recovery. The effectiveness of these policies depends on the size of fiscal multipliers. A large body of economic literature has estimated such multipliers, with gradually increasing precision, due to econometric improvements and better ways to identify fiscal impulses. Overall, the largest multipliers are found to be associated with public investment, as opposed to other types of spending. Such public investment multipliers are typically below one in the short run, but studies with multi-year horizons suggest that values higher than unity can be attained over time. The size of multipliers is sensitive to economic conditions. During recessions, and periods of high unemployment, transfer payments appear sometimes to offer higher multipliers than public investment. An important exception is when fiscal and monetary policies are closely coordinated and interest rates approach zero, conditions that provide the strongest evidence for the efficacy of public investment multipliers. Other institutional factors also play a crucial role in determining the size of the public investment multiplier, in particular the country's absorptive capacity, and the selection of high-quality shovel ready projects. However, there is limited empirical evidence available on the magnitude of fiscal multipliers in developing country settings, or for infrastructure sectors or subsectors specifically. The few studies available suggest that certain types of green infrastructure (energy efficiency, solar energy, and so forth) may bring employment benefits in the short run, while innovative digital infrastructure may yield longer-run benefits for economic growth. The relevance of these findings to the current COVID-19 crisis is explored.
Original languageEnglish
Place of PublicationWashington, DC
PublisherWorld Bank Publications
Number of pages41
DOIs
Publication statusPublished - Oct 2021
Externally publishedYes
SeriesWorld Bank. Policy Research Working Papers (Online)
ISSN1813-9450

Keywords

  • Fiscal stimulus
  • Infrastructure investment
  • Countercyclical policy
  • Coronavirus
  • Covid-19
  • Pandemic response

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