Public investment efficiency and monetary policy consequences: The case of investment ratio enhancing policy in Russia

Abstract

The article analyzes the effects of measures to raise the investment rate from 21% to 25% of GDP up to 2024 on GDP growth and monetary policy. We conduct the analysis using an econometric general equilibrium model that reflects key features of the Russian economy. Achieving the target sequentially implies adding about 14 p. p. of GDP of public and/or private investment over 2019—2024 compared to the unchanged investment rate scenario. We find raising private investment to be the most efficient for stimulating GDP growth up to 2024. Among sources of public investment funding, using the sovereign wealth fund gives the highest GDP growth up to 2024. Nevertheless, given low public investment efficiency, a significant fraction of GDP growth becomes inflationary in this case. If the central bank minimizes the risk of inflation, inefficient public investment can lead the economy to equilibrium with higher private interest rates.