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An Estimation and Decomposition of the Government Investment Multiplier

Author

Listed:
  • Marius Clemens
  • Claus Michelsen
  • Malte Rieth

Abstract

We construct a narrative instrument for government investment from official records in Germany. Using structural vector autoregressions, we document a significant crowding-in of private investment and an output multiplier of roughly 2. Then, we match a New Keynesian dynamic stochastic general equilibrium model to the empirical responses, and we decompose the multiplier into three channels. Public investment reduces private investment costs in the short run, it increases the production capacity in the medium run, and it generates demand effects along the production network. We find a similar multiplier in other euro area countries, using an indirect instrumental variable strategy.

Suggested Citation

  • Marius Clemens & Claus Michelsen & Malte Rieth, 2025. "An Estimation and Decomposition of the Government Investment Multiplier," Discussion Papers of DIW Berlin 2106, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp2106
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    References listed on IDEAS

    as
    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
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    5. Valerie A. Ramey & Sarah Zubairy, 2018. "Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 850-901.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Fiscal policy; public investment; structural vector autoregression; instrumental variable; general equilibrium model; Germany;
    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
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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