Guillermo Vuletin, Alejandro Izquierdo, Ruy Lama, Juan Pablo Medina, Jorge Puig, Daniel Riera-Crichton, Carlos Vegh
2019-06-13 - We contribute to the literature studying the aggregate macroeconomic efects of public investment. In particular, we analyze whether the size of the public investment multiplier depends on the initial stock of public capital. Using a calibrated neoclassical growth model, we find that it does. In particular, when the stock of public capital is low, and based on simple first principle arguments, the marginal product of an additional unit of public investment is large and, therefore (coupled with synergies with private investment) delivers large public investment multipliers. On the contrary, when starting with a high stock of public capital, such an impact is small. On the empirical front, we show robust evidence in favor of our novel theoretical contribution using alternative samples, levels of government, and identification strategies. In particular, we provide evidence based on a European sample of 31 countries, U.S. states, and Argentinean provinces, relying on Blanchard and Perotti (2002), public spending forecast errors (like in Auerbach and Gorodnichenko 2010 and 2012), and an instrumental variable approach, respectively.