Government consumption and investment: Does the composition of purchases affect the multiplier?

Abstract

A large and conventional class of macroeconomic models predicts that short-lived government investment shocks have a smaller fiscal multiplier than government consumption shocks. I test this prediction in a panel of OECD countries using real-time forecasts of government consumption and investment to purify changes in purchases of their predicted components. Consistent with theory, the estimated government investment multiplier is near zero and the government consumption multiplier approximately 0.8. These findings suggest that fiscal stimulus packages which contain large government investment components may not be as effective at stimulating aggregate demand as commonly thought.