How large is the Government Spending Multiplier? Evidence from World Bank Lending

By Aart C. Kraay. 2010

186 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/ee7ca1fe2b82b1ffaec7022da190184ff64400c6

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In Economics and Econometrics

Citations in the corpus

Government Spending Multipliers in Developing Countries : Evidence from Lending by Official Creditors (2012, unknown): “32 Finally, in panel D of Table 8 I revisit a potential source of heterogeneity in multipliers discussed in Kraay ( 2012 ) , based on cross-country differences in the extent to which government spending is aid-financed.”
The effect of aid on growth: evidence from a Quasi-experiment (2014, unknown): “…of the form aid takes, it constitutes a flow of funds to recipient countries, which, if they are financially and perhaps fiscally constrained (see Kraay 2012), would release resources in the economy that could be Ta bl e 7 M od el ro bu st ne ss ch ec ks (1 ) (2 ) (3 ) (4 ) (5 ) (6 ) E xc l. la…”
Fiscal Multipliers : Size, Determinants, and Use in Macroeconomic Projections (2014, background): “Panel LICs Kraay (2012) 0.”
How Big (Small?) are Fiscal Multipliers? (2011, unknown): “4See http://circa.europa.eu/irc/dsis/nfaccount/info/data/ESA95/en/een00000.htm for more details.”
Natural Experiments in Macroeconomics (2015, unknown): “A very early paper testing this prediction is Kreinin (1961), whose analysis was later supported by further evidence by Landsberger (1966).”
Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions (2014, unknown): “In our baseline model, we assume (7)Kraay (2012) estimates a government spending multiplier of about 0.”
Macroeconomic Policy in the Time of COVID-19 (2020, background): “A multiplier between zero and one (as in Kraay 2012, 2014) means that a $1 increase in government spending will increase output by less than $1: that is, private consumption or private investment get crowded out.”
Public Investment in Resource-Abundant Developing Countries (2012, background): “Based on a large project-level disbursement data set, Kraay (2012), however, finds that World Bank projects have small output multipliers in low-income countries.”