Publication: Government Spending Multipliers in Developing Countries: Evidence from Lending by Official Creditors
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Date
2014-10
ISSN
1945-7707
Published
2014-10
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The author uses a novel loan-level dataset covering lending by official creditors to developing country governments to construct an instrument for government spending. Loans from official creditors typically finance multiyear public spending projects, with disbursements linked to the stages of project implementation. The identification strategy exploits the long lags between approval and eventual disbursement of these loans to isolate a predetermined component of public spending associated with past loan approval decisions taken before the realization of contemporaneous shocks. In a large sample of 102 developing countries over the period 1970-2010, the one-year spending multiplier is reasonably-precisely estimated to be around 0.4.
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Publication Government Spending Multipliers in Developing Countries : Evidence from Lending by Official Creditors(World Bank, Washington, DC, 2012-06)This paper uses a novel loan-level dataset covering lending by official creditors to developing country governments to construct an instrument for public spending that can be used to estimate government spending multipliers. Loans from official creditors (primarily multilateral development banks and bilateral aid agencies) are a major source of financing for government spending in developing countries. These loans typically finance public spending projects that take several years to implement, with multiple disbursements linked to the stages of project implementation. The long disbursement periods for these loans imply that the bulk of government spending financed by official creditors in a given year reflects loan approval decisions made in many previous years, before current-year macroeconomic shocks are known. Loan-level commitment and disbursement transactions from the World Bank's Debtor Reporting System database are used to isolate a predetermined component of government spending associated with past loan approvals. This can be used as an instrument to estimate spending multipliers for a large sample of 102 developing countries. The one-year government spending multiplier is reasonably-precisely estimated to be around 0.4, and there is some suggestive evidence that multipliers are larger in recessions, in countries less exposed to international trade, and in countries with flexible exchange rate regimes.Publication How Large Is the Government Spending Multiplier? Evidence from World Bank Lending(2010-12-01)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.Publication Government Spending Multipliers in Developing Countries : Evidence from Lending by Official Creditors(American Economic Association, 2014-10)This paper uses a novel loan-level dataset covering lending by official creditors to developing country governments to construct an instrument for government spending. These loans typically finance multi-year spending projects, with disbursements linked to the stages of project implementation. The identification strategy exploits the long lags between approval and eventual disbursement of these loans to isolate a predetermined component of public spending associated with past loan approval decisions taken before the realization of contemporaneous shocks. In a large sample of 102 developing countries over the period 1970-2010, the one-year spending multiplier is reasonably-precisely estimated to be around 0.4.Publication "Crowding in" and the Returns to Government Investment in Low-Income Countries(World Bank, Washington, DC, 2014-02)This paper estimates the effect of government investment on private investment in a sample of 39 low-income countries. Fluctuations in a predetermined component of disbursements on loans from official creditors to developing country governments are used as an instrument for fluctuations in public investment. The analysis finds evidence of "crowding in": an extra dollar of government investment raises private investment by roughly two dollars, and output by 1.5 dollars. To understand the implications for the return to public investment, a CES production function with public and private capital as inputs is calibrated. For most countries in the sample, the returns to government investment exceed the world interest rate. However, for some countries that already have high government investment rates, the return to further investment is below the world interest rate.Publication Fiscal Multipliers in Recessions and Expansions : Does It Matter Whether Government Spending Is Increasing or Decreasing?(World Bank Group, Washington, DC, 2014-07)Using non-linear methods, this paper finds that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. For industrial countries, the problem originates in the fact that, contrary to one's priors, it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the "true" long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In the case of developing countries, the bias results from the fact that the multiplier for recessions and government spending going down (the "when-it-rains-it-pours" phenomenon) is larger than when government spending is going up.
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