Public investment multipliers: Evidence from stock returns of the road pavement industry in Japan

Abstract

This study contributes empirical evidence of the macroeconomic impacts of public investment. I extract public investment news shocks from the excess returns of narrowly defined road pavement firms and use them as an instrument for future public investment spending. Using Japanese data for the period between 1980 and 2014, I find that when the news shock is followed by a persistent increase in public investment and a weak real interest rate response, the public investment spending has a significant stimulative effect over the medium term. The estimated cumulative multiplier is as large as 6.10, four years after the shock. However, the cumulative multiplier eventually falls below 1 after 10 years. I also report a substantial temporary improvement in aggregate labor productivity associated with a rise in public investment spending.