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Increasing public investment can be an effective policy in bad times: Evidence from emerging EU economies

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  • Petrović, Pavle
  • Arsić, Milojko
  • Nojković, Aleksandra

Abstract

Using Local projections and a Panel Structural Vector Auto-Regressive model, we evaluate the effectiveness of fiscal policy in the Central and East European EU economies. We find that an increase in public investment has a strong positive effect on output, employment, wages and consumption during periods of economic downturn. Deficit-financed public investment does not increase the debt-to-GDP ratio and is essentially self-financed. In contrast, an increase in public consumption has little impact on economic activity and increases the debt-to-GDP ratio. The observed short term effects concur with a neo-Keynesian pattern suggesting that increase in public investment boosts the demand for labor in the private sector, leading to higher real wages and higher consumption. In the medium term, an increase in public investment enhances private investment thus generating supply side effect. We conclude that public investment can be an important policy instrument for combatting recessions and stimulating long-run growth, since monetary policy has run out of steam.

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  • Petrović, Pavle & Arsić, Milojko & Nojković, Aleksandra, 2021. "Increasing public investment can be an effective policy in bad times: Evidence from emerging EU economies," Economic Modelling, Elsevier, vol. 94(C), pages 580-597.
    • Handle: RePEc:eee:ecmode:v:94:y:2021:i:c:p:580-597
    DOI: 10.1016/j.econmod.2020.02.004
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    2. Fangfang Liu & Zheng Ma & Ziqing Wang & Shaobo Xie, 2022. "Trade-Off between COVID-19 Pandemic Prevention and Control and Economic Stimulus," IJERPH, MDPI, vol. 19(21), pages 1-22, October.
    3. Ly Dai Hung, 2021. "Economic Growth with Public and Foreign Investment in Vietnam," Working Papers hal-03241846, HAL.
    4. BĂTUȘARU Cristina Maria & SBÂRCEA Ioana Raluca, 2023. "Security In The Context Of Sustainability: The Implications On Defence Expenditures," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 18(2), pages 48-66, August.
    5. Giovanna Ciaffi & Matteo Deleidi & Michele Capriati, 2024. "Government spending, multipliers, and public debt sustainability: an empirical assessment for OECD countries," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 41(2), pages 521-542, July.
    6. Amir Masoud Rahmani & Seyedeh Yasaman Hosseini Mirmahaleh, 2024. "An Intelligent Algorithm to Predict GDP Rate and Find a Relationship Between COVID-19 Outbreak and Economic Downturn," Computational Economics, Springer;Society for Computational Economics, vol. 63(3), pages 1001-1020, March.
    7. Ji, Xiangfeng & Chen, Xueqi & Mirza, Nawazish & Umar, Muhammad, 2021. "Sustainable energy goals and investment premium: Evidence from renewable and conventional equity mutual funds in the Euro zone," Resources Policy, Elsevier, vol. 74(C).
    8. Giovanna Ciaffi & Matteo Deleidi & Enrico Sergio Levrero, 2022. "The Macroeconomic Impact of Public Spending in Research and Development: An Initial Exploration for G7 and 15 Oecd Countries," Bulletin of Political Economy, Bulletin of Political Economy, vol. 16(1), pages 1-19, June.
    9. Fatih Chellai, 2021. "What Can SVAR Models Tell us About the Impact of Public Expenditure Shocks on Macroeconomic Variables in Algeria? A Slight Hint to the COVID-19 Pandemic," Folia Oeconomica Stetinensia, Sciendo, vol. 21(2), pages 21-37, December.

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    More about this item

    Keywords

    Fiscal multipliers; Public investment; Stabilisation policy; Keynesian vs. neoclassical view of fiscal policy; Emerging EU economies;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling

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