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How large is the government spending multiplier ? evidence from World Bank lending
 
Author:Kraay, Aart; Collection Title:Policy Research working paper ; no. WPS 5500
Country:World; Date Stored:2010/12/13
Document Date:2010/12/01Document Type:Policy Research Working Paper
SubTopics:Economic Stabilization; Debt Markets; Banks & Banking Reform; Urban Economics; Public Sector EconomicsLanguage:English
Major Sector:Public Administration, Law, and JusticeRel. Proj ID:1W-Reforms And Growth- -- P080834;
Region:The World RegionReport Number:WPS5500
Sub Sectors:Central government administrationTF No/Name:TF098053-KCPII - Industrial Policy in an Uncertain Environment
Volume No:1 of 1  

Summary: 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.

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