An Estimation and Decomposition of the Government Investment Multiplier
Overview
Paper Summary
This study finds that government investment in Germany has a significant positive effect on the economy, leading to a crowding-in of private investment and an output multiplier of around 2. Specifically, investments in infrastructure seem most effective. The study constructs a narrative instrument to identify exogenous changes in investment policy, addressing concerns about reverse causality.
Explain Like I'm Five
Government spending on things like roads and schools can actually boost the economy by encouraging businesses to invest more and create jobs.
Possible Conflicts of Interest
None identified
Identified Limitations
Rating Explanation
This paper presents a strong case for the positive effects of government investment in Germany using novel data and methods. The identification strategy with the narrative instrument is clever. While there are some limitations regarding generalizability, the detailed analysis for Germany makes the study valuable. The DSGE analysis adds depth to the findings.
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