Public investment multipliers and the role of efficiency: new evidence for emerging markets

This paper estimates the public investment multiplier in a sample of emerging economies across Latin America and the Caribbean under a common methodological approach. Based on the Local Projections method, we identify fiscal shocks using timing restrictions for a panel of 11 countries observed over the last 30 years. The results show that the multiplier is, on average, 1.1 two years after the investment shock. In addition, we find heterogeneous multiplier effects depending on the degree of public investment efficiency. Under low levels of efficiency, public investment does not affect economic activity. However, the multiplier is 2.5 and private sector investment is stimulated for higher levels of efficiency. By shedding light on the size of the public investment multiplier and its sensitivity to efficiency levels, our findings inform the design of fiscal policy strategies conducive to sustainable growth in emerging markets.