Publication: How Large Is the Government Spending Multiplier? Evidence from World Bank Lending
Date
2010-12-01
ISSN
Published
2010-12-01
Author(s)
Abstract
This paper proposes a novel method of
isolating fluctuations in public spending that are likely to
be uncorrelated with contemporaneous macroeconomic shocks
and can be used to estimate government spending multipliers.
The approach relies on two features unique to many
low-income countries: (1) borrowing from the World Bank
finances a substantial fraction of public spending, and (2)
actual spending on World Bank-financed projects is typically
spread out over several years following the original
approval of the project. These two features imply that
fluctuations in spending on World Bank projects in a given
year are in large part determined by fluctuations in project
approval decisions made in previous years, and so are
unlikely to be correlated with shocks to output in the
current year. World Bank project-level disbursement data are
used to isolate the component of public spending associated
with project approvals from previous years, which in turn
can be used to estimate government spending multipliers, in
a sample of 29 aid-dependent low-income countries. The
estimated multipliers are small, reasonably precisely
estimated, and rarely significantly different from zero.
Link to Data Set
Citation
“Kraay, Aart. 2010. How Large Is the Government Spending Multiplier? Evidence from World Bank Lending. Policy Research working paper ; no. WPS 5500. © http://hdl.handle.net/10986/3983 License: CC BY 3.0 IGO.”
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