metadata: authors: 0: author: Vagliasindi,Maria
1: author: Gorgulu,Nisan
count: World
docna: 0: docna: What Have We Learned about the Effectiveness
            of Infrastructure Investment as a Fiscal Stimulus ? A
            Literature Review
docty: Policy Research Working Paper
subtopic: Labor Markets,Energy Demand,Energy and Mining,Energy and Environment,Transport Services,Fiscal & Monetary Policy,Public Finance Decentralization and
            Poverty Reduction,Public Sector Economics,Economic Adjustment and Lending,Macroeconomics and Economic Growth,Economic Policy, Institutions and Governance,Macro-Fiscal Policy
teratopic: Social Protections and Labor,Energy,Transport,Macroeconomics and Economic Growth,Public Sector Development
abstracts: cdata!: Since the Great Depression of the 1930s,
            and through the more recent Asian Crisis of 1997 and Great
            Recession of 2008/09, governments have experimented with
            Keynesian style fiscal stimulus to support employment and
            accelerate economic recovery. The effectiveness of these
            policies depends on the size of fiscal multipliers. A large
            body of economic literature has estimated such multipliers,
            with gradually increasing precision, due to econometric
            improvements and better ways to identify fiscal impulses.
            Overall, the largest multipliers are found to be associated
            with public investment, as opposed to other types of
            spending. Such public investment multipliers are typically
            below one in the short run, but studies with multi-year
            horizons suggest that values higher than unity can be
            attained over time. The size of multipliers is sensitive to
            economic conditions. During recessions, and periods of high
            unemployment, transfer payments appear sometimes to offer
            higher multipliers than public investment. An important
            exception is when fiscal and monetary policies are closely
            coordinated and interest rates approach zero, conditions
            that provide the strongest evidence for the efficacy of
            public investment multipliers. Other institutional factors
            also play a crucial role in determining the size of the
            public investment multiplier, in particular the
            country&#x2019;s absorptive capacity, and the selection
            of high-quality shovel ready projects. However, there is
            limited empirical evidence available on the magnitude of
            fiscal multipliers in developing country settings, or for
            infrastructure sectors or subsectors specifically. The few
            studies available suggest that certain types of green
            infrastructure (energy efficiency, solar energy, and so
            forth) may bring employment benefits in the short run, while
            innovative digital infrastructure may yield longer-run
            benefits for economic growth. The relevance of these
            findings to the current COVID-19 crisis is explored.
repnme: repnme: What Have We Learned about the
            Effectiveness of Infrastructure Investment as a Fiscal
            Stimulus ? A Literature Review
display_title: What Have We Learned about the
            Effectiveness of Infrastructure Investment as a Fiscal
            Stimulus ? A Literature Review
listing_relative_url: /research/2021/10/33469785/learned-effectiveness-infrastructure-investment-fiscal-stimulus-literature-review
topicv3: Energy and Extractives m1326595 507,Fiscal Stimulus and Fiscal Rules m1326652 1073,Transport m1326661 135,Jobs m1503931 2670,Fiscal Stimulus m1582943 4485
publishtoextweb_dt: 2021-10-06T00:00:00Z
dois: 10.1596/1813-9450-9796
historic_topic: Social Protections and Labor,Energy,Transport,Macroeconomics and Economic Growth,Public Sector Development
origu: Chief Economist Infrastructure (INFCE)
no_of_pages: 41
author_keys: 0: author_key: 619680
1: author_key: 1761041
model_extractions: Policy Research Working Paper 9796 What Have We Learned about the Effectiveness of Infrastructure Investment as a Fiscal Stimulus?

A Literature Review _Maria Vagliasindi Nisan Gorgulu_ Infrastructure Chief Economist Office October 2021
Policy Research Working Paper 9796

# **Abstract**

Since the Great Depression of the 1930s, and through the more recent Asian Crisis of 1997 and Great Recession of 2008/09, governments have experimented with Keynesian style fiscal stimulus to support employment and accelerate economic recovery. The effectiveness of these policies depends on the size of fiscal multipliers. A large body of economic literature has estimated such multipliers, with gradually increasing precision, due to econometric improvements and better ways to identify fiscal impulses. Overall, the largest multipliers are found to be associated with public investment, as opposed to other types of spending. Such public investment multipliers are typically below one in the short run, but studies with multi-year horizons suggest that values higher than unity can be attained over time. The size of multipliers is sensitive to economic conditions. During recessions, and periods of high unemployment, transfer payments appear sometimes to offer higher multipliers than public investment. An important exception is when fiscal and monetary policies are closely coordinated and interest rates approach zero, conditions that provide the strongest evidence for the efficacy of public investment multipliers. Other institutional factors also play a crucial role in determining the size of the public investment multiplier, in particular the country’s absorptive capacity, and the selection of high-quality shovel ready projects. However, there is limited empirical evidence available on the magnitude of fiscal multipliers in developing country settings, or for infrastructure sectors or subsectors specifically. The few studies available suggest that certain types of green infrastructure (energy efficiency, solar energy, and so forth) may bring employment benefits in the short run, while innovative digital infrastructure may yield longer-run benefits for economic growth. The relevance of these findings to the current COVID-19 crisis is explored.

This paper is a product of the Infrastructure Chief Economist Office. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at mvagliasindi@worldbank.org and ngorgulu@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **What Have We Learned about the Effectiveness of Infrastructure Investment**

# **as a Fiscal Stimulus? A Literature Review***

Maria Vagliasindi and Nisan Gorgulu**

## **JEL:** C54, E32, E62, H20, H5, N10, Q4, R4

**Keywords:** Infrastructure investment, fiscal stimulus, economic growth, COVID-19, infrastructure stimulus, countercyclical policy

*Special thanks go to Luis Andres, Tito Cordella, Vivien Foster, Fernanda Ruiz-Nunez and Stephane Straub for the excellent comments and insightful suggestions on a previous draft of the paper and Fan Zhang for her initial work on this topic summarized in Foster, Vivien (2020) Addressing crisis through infrastructure Official Monetary and Financial Institutions Forum, Op-Ed.

** Maria Vagliasindi is Lead Economist in the Chief Economist Office of the Infrastructure Practice Group, and Nisan Gorgulu is Short Term Consultant in the same unit.
# **1. Introduction**

According to the Keynesian approach, government spending can be used as a powerful stimulus, particularly during times of high unemployment. A large body of economic literature, starting from the Great Recession, has estimated fiscal multipliers first focusing on overall government spending, and then disentangling some subcomponents, such as public investments, and in few cases public infrastructure investment. The effectiveness of fiscal stimulus packages features prominently in public debates surrounding the current COVID-19 crisis, as policy makers seek to understand whether encouraging public investment/infrastructure would help to raise economic growth, increase productivity, and crowding in the private sector.

The objective of this paper is to review the academic literature on fiscal multipliers in general, as well as the efficacy of the fiscal response to previous crises in particular, so as to draw the key lessons that can be applied to the current COVID-19 crisis. Despite our focus being on investment in infrastructure for developing countries, this nonetheless leads us to a broader examination on the fiscal multiplier literature across all types of spending, much of which centers on developed countries due to limitations in data and available research.

Ramey's (2011) pioneering contribution, surveying the literature after the 2009 financial crisis, finds fiscal spending multipliers for developed economies within the 0.5 to 2 range. Subsequent contributions -- including Ramey (2019) -- refine such estimates, coming up with a narrower 0.6 to 1 range. The narrowing range of estimates are partly due to new techniques used to compute fiscal spending multipliers. In a nutshell, the encouraging news is that their value is positive but less than or equal to unity, meaning that spending raises gross domestic product (GDP), but does not stimulate additional private activity and may crowd it out.

The remainder of the paper is structured as follows. Section 2 reviews the key findings on the size of fiscal multipliers. Section 3 provides a historical perspective on the effectiveness of fiscal stimulus during crises. Section 4 provides early evidence of stimulus packages announced during the COVID-19 pandemic. Section 5 draws preliminary policy recommendations.

# **2. Evidence on the Magnitude of Fiscal Multipliers**

Fiscal multipliers are generally derived from the calibration of New Keynesian DSGE models, from structural macro-econometric models, and the so-called narrative method. Since the work of Fatás and Mihov (2001) and the seminal contribution by Blanchard and Perotti (2002), empirical estimates of fiscal multipliers tend to rely on vector autoregressive (VAR) models, with new contributions increasingly making use of sophisticated identification techniques to address the possible endogeneity of fiscal shocks. While the long time series available for countries such as the US allows for the use of narrative methods to identify exogenous shocks (Ramey, 2011), estimates based on shorter time series for European and developing countries still rely on less refined methods. As noted in Kraay (2012), whereas different types of government spending may have different short-run effects on output identify disaggregated multipliers is limited by imperfect data on the composition of spending. Identifying a plausible identification strategy for total spending is hard enough. Once different subcomponents of government spending are considered, separate instruments for the different types of spending would need to be considered, which makes the problem extremely challenging.

2
The narrative approach constitutes a methodological improvement upon the traditional measurement of fiscal shocks. The structural VAR methodology, which employs output elasticities of expenditure to filter out automatic stabilizers, may fail to capture exogenous policy changes correctly, because changes in expenditure are not only due to output developments and discretionary policy, but may also be attributable to asset and commodity price movements. The narrative approach instead seeks to identify exogenous fiscal shocks directly. In addition, SVAR models by providing “average” multiplier may not be able measure accurately fiscal multipliers in the case countries have been implementing major structural changes. Finally, they may not be able capture state-contingent multiplier unless they employ non linear estimations. One advantage of DSGE models is that they describe the behavior of the economy as a whole by analyzing the interaction of many microeconomic decisions. However, results of simulations tend to be sensitive to the choice of certain parameters (e.g., degree of price and wage rigidities, investment adjustment cost, and proportion of liquidity-constrained agents) and to the specific modeling assumptions, especially if the models are calibrated rather than estimated.

To illustrate how different definitions of the multiplier can lead to strikingly different estimates, Ramey (2019) computes the effects of fiscal spending shocks, with three different methods. The first one follows the approach of Blanchard and Perotti (2002), focusing on the ratio between the peak of the response of output and the impact response of fiscal spending. This method leads to a ‘quasi‐multiplier’ because it overlooks the role played by fiscal spending persistence. The second one follows Mountford and Uhlig (2009) proposing computing cumulative fiscal multipliers discounting the future realization of output and fiscal spending as predicted by the VAR impulse responses. The third one based on the analysis of Hall (2009) and Barro and Redlick (2011) avoids the use of the ratio between output over public spending conversion ratio to convert the estimated elasticities to dollar terms (by transforming the variables employed in the analysis to the same units before the estimation of the econometric model). This is achieved by dividing them either by past real GDP or by past real potential GDP.<sup>1</sup> The key conclusion from Ramey’s (2019) comparison is that the calculation of multipliers à la Blanchard and Perotti (2002) can induce a substantial upward bias in the figures related to this spending multiplier. Once the persistence of spending is taken into account, the multiplier becomes less than one. Getting rid of the conversion factor reduces even further the multiplier, at least conditional on the data set employed by Ramey (2019).

In sum, the more plausible lower-end estimates of the fiscal multipliers come from more data-driven time series and narrative methods, while the upper bounds are the outputs of more sophisticated calibrated models, based on new Keynesian types of model and the use of vector autoregressive (VAR) models. However, the calibration sometimes relies on strong assumptions either in the theoretical models or in the econometric analyses to identify the fiscal policy effect.

In the following sub-sections, we explore the range of multipliers, depending on the fiscal instrument used, on the “state” of the economy as well as the composition of government spending, focusing on infrastructure investments.

Within sections 2.1 and 2.2, the concept of “multiplier” used to capture the impact of fiscal stimulus packages is simply the ratio of the expected change in output (GDP) over the proposed government outlay.

> 1 The use of this conversion factor is problematic for two reasons. First, it is unstable over long sample periods. Second, as noted by Sims and Wolff (2018), the numerator is acyclical while the denominator is procyclical. Hence, the ratio is procyclical too, which implies that the use of a constant ratio overestimates the spending multiplier in recessions (and underestimates it in expansions).

3
TM Max @Min X Mean <!-- Start of picture text --> 6<br>4<br>2<br>0<br>-2<br>-4<br>6<br>Spending Investment Tax Transfer<br><!-- End of picture text -->
**Table 1: Survey of Public Investment and Spending Multipliers**

|**Country &**<br>**Region**|**World Bank**<br>**Income**<br>**Group (2020)**|**Author(s)**|**Study**<br>**Period**|**Methodology,**<br>**including**<br>**identification**<br>**strategy**|**Multiplier range**|**Type**|
|---|---|---|---|---|---|---|
|Peru|Upper Middle<br>Income|Central<br>Reserve<br>Bank of<br>Peru (2012)|1992-2012|VAR (output<br>elasticities of<br>expenditure to filter<br>out automatic<br>stabilizers)|0.24; 0.92 (short-<br>term)<br>0.49; 1.42(medium-<br>term)|Current; Capital<br>spending|
|Peru|Upper Middle<br>Income|Rossini_et_<br>_al._(2012)|2005-2011|SVAR (a<br>multivariate, linear<br>representation of a<br>vector of observables<br>on its own lags)|0.78; 1.36 (short-<br>term) 0.52; 2.63<br>(medium-term)|Current; Capital<br>spending|
|Australia|High Income|Hunt_et al._<br>(2009)||DSGE model<br>(simulated impacts<br>on the output)|1.22<br>1.12|Public Investment<br>Public Consumption|
|Czech<br>Republic|High Income|Ambrisko<br>_et al._<br>(2015)|1996 - 2011|DSGE model<br>(simulated impacts<br>on the output)|0.5 (in the first year)<br>0.6 (in the first year)|Government<br>investment<br>Government<br>Consumption|
|Germany|High Income|Veld<br>(2016)||European<br>Commission’s macro<br>Quest model<br>simulations<br>(simulations under<br>different scenarios)|0.6|Public Investment|
|Italy|High Income|Acconcia_et_<br>_al._(2014)|1990 - 1999|OLS with IV to<br>address endogeneity|1.5|Public spending|
|Japan|High Income|Bruckner<br>and<br>Tuladhar<br>(2014)|1990 - 2010|Panel VAR at<br>prefecture level|0.26|Government Spending|
|Japan|High Income|Kanazawa<br>(2018)|1980 - 2014|Local projection – IV<br>method (using the<br>extracted measure of<br>the excess return<br>shocks as an<br>instrument variable)|1.64 (after one year)|Public Investment|
|Japan|High Income|Kuttner and<br>Posen<br>(2002)|1990 - 1999|VAR (output<br>elasticities of<br>expenditure to filter<br>out automatic<br>stabilizers)|2 (cumulative four-<br>year multiplier)|Public Spending|

5
|**Country &**<br>**Region**|**World Bank**<br>**Income**<br>**Group (2020)**|**Author(s)**|**Study**<br>**Period**|**Methodology,**<br>**including**<br>**identification**<br>**strategy**|**Multiplier range**|**Type**|
|---|---|---|---|---|---|---|
|Japan|High Income|Miyamoto<br>_et al._<br>(2017)|1980 – 1995<br>1996 – 2014<br>(Zero lower<br>bound)|Local projection<br>method (estimates<br>impulse response<br>functions on shocks<br>as well as lags of<br>variables usually<br>entering a vector<br>autoregression)|0.6<br>1.5|Government Spending|
|Korea, Rep|High Income|Eskesen<br>and Lueth<br>(2009)||DSGE (simulated<br>impacts on the<br>output)|0.8|Government<br>Investment and<br>Consumption|
|Netherlands|High Income|Veld<br>(2016)||European<br>Commission’s macro<br>Quest model<br>simulations|0.5|Public Investment|
|Gulf<br>Cooperation<br>Council<br>Countries|High Income|Espinoza<br>and<br>Senhadji<br>(2011)|1975-2009|VAR linking real<br>GDP, real<br>government<br>expenditure and non-<br>oil real GDP. The<br>VAR estimated in<br>growth rates using<br>three lags|0.3 - 0.7<br>0.6 - 1.1|Current Expenditure<br>Capital Spending|
|Spain|High Income|Pereira and<br>de Frutos<br>(1999)|1970-1989|VAR (this approach<br>does not impose a<br>priori restrictions on<br>the dynamic<br>relations among the<br>different variables)|0.65 (after two years)|Public capital<br>accumulation|
|United States|High Income|Coenen_et_<br>_al._(2012)||DSGE (simulated<br>impacts on the<br>output)|1|Government Spending|
|United States|High Income|Erickson_et_<br>_al._(2015)|2001-2012|OLS with IV to<br>address endogeneity|1.5|Federal Government<br>Spending|
|United States|High Income|Ramey &<br>Zubairy<br>(2018)|1889-2015|Local projection<br>method (based on<br>sequential<br>regressions of the<br>endogenous variable<br>shifted several steps<br>ahead)|0.66 (after two years)<br>0.71 (after four years)|Government Spending|
|United States|High Income|Zandi<br>(2008)||Moody’s<br>Economy.com macro<br>model|1.59 (after one year)|Government Spending|
|**Country &**<br>**Region**|**World Bank**<br>**Income**<br>**Group (2020)**|**Author(s)**|**Study**<br>**Period**|**Methodology,**<br>**including**<br>**identification**<br>**strategy**|**Multiplier range**|**Type**|
|---|---|---|---|---|---|---|
|**102**<br>**Developing**<br>**Countries**||Kraay<br>(2014)|1970-2010|IV to address<br>endogeneity (the lags<br>between<br>commitments and<br>eventual<br>disbursements on<br>loans by official<br>creditors to<br>developing country<br>governments)|0.4|Spending|
|11 European<br>Countries|High Income|Deleidi_et_<br>_al._(2020)|1970-2016|Local Projections<br>approach on a panel<br>dataset and<br>considering different<br>model specifications|0.96|Public Investment|
|17 OECD<br>economies|High Income|Abiad_et al._<br>(2015)|1985-2013|Local projections<br>method (estimates<br>impulse response<br>functions by directly<br>projecting a variable<br>of interest on shocks<br>as well as lags of<br>variables usually<br>entering a vector<br>autoregression)|1.4 (medium-term)|Public Investment|

_Source:_ Compiled by authors As shown by the table, fiscal multiplier estimates (even using the same broad methodology, country, and time period) are heterogeneous. Some reasons for the differences across estimates are due to the role of institutional settings or the asymmetry of fiscal multipliers in different business cycle phases. Data choices and identification strategies are also found to have important effects on the precision of multiplier estimates.

Overall estimates for public spending and investment multipliers are modest and generally less than one. However, what is most striking about the findings is that public investment multipliers grow and have more lasting effects over time. Studies estimating the impact for the long run or over a multi-year horizon find larger multipliers than the studies measuring the impact on the same year or after one year. As illustrated by Leeper _et al._ (2010) implementation delays can produce small or even negative labor and output responses in the short run.

In sum, the key lessons underscore that the spending multiplier is highly sensitive to different modeling and methodological choices, as well as even more innocuous choices of time period considered in the analysis. Overall, one of the strongest findings is that investment and spending are more effective than tax cuts and transfer payments. In the next section, we will consider whether such a finding will be robust to the different specifications of the “state” of the economy and other institutional factors.

7
# **2.2 Multipliers across Macroeconomic Conditions**

While empirical estimates of the size of fiscal multipliers vary widely, there is a somewhat broader consensus that the effectiveness of fiscal policies depend crucially on macroeconomic conditions, such as _inter alia_ the interaction between fiscal and monetary policies, and financing mechanisms. It also depends crucially on a broader set of factors such as the selection and timeliness of projects, and the underpinning characteristics.

## **_Macroeconomic “state dependent multipliers”_**

Some of the challenges of the “state” dependent estimation of multipliers comes from the fact that the identified changes in government spending must be exogenous and big enough to be able to disentangle their effects from other economic shocks. Informative estimates require that the states span over a sufficient portion of the sample and that the exogenous changes in government spending spread across the states. Because there is no scope for controlled, randomized trials on countries, all estimates of aggregate government multipliers are necessarily relying on historical episodes. Unfortunately, the data do not allow to build clean natural experiments and is often subject to simultaneous equations bias (Ramey and Zubairy, 2018).

Table 2 summarizes the macroeconomic conditions that contribute to the higher effectiveness of fiscal stimulus. We will focus the discussion on those for which the economic literature provides stronger evidence.

**Table 2: Conditions affecting the effectiveness of fiscal stimulus**

|**State variables**|**Conditions for higher multipliers**|**Reference**|
|---|---|---|
|**Exchange rate regime**|Fixed (as opposed to floating) exchange rate|Ilzetzki_et al._(2013)|
|**Openness to trade**|Less open economy|Ilzetzki_et al._, 2013; Gonzalez-Garcia,<br>Lemus, and Mrkaic (2013)|
|**Public indebtedness**|Lower levels of public debt|Batini_et al._(2014); Corsetti et al., (2012);<br>Ilzetzki_et al._, (2013); Nickel and Tudyka,<br>(2014); Huidrom_et al._(2019)|
|**State of economy**|Recessions (as opposed to booms or<br>average periods)|Broda and Parker (2014); Bachmann and<br>Sims, 2012; Owyang_et al. (_2013); Ramey<br>and Zubairy (2018)|
|**Stage of development**|Inconclusive evidence|Sheremirov and Spirovska (2019); Arizala_et_<br>_al. (_2017); Kraay, 2010; Ilzetzki_et al._<br>(2013). Izquierdo_et al._(2019). Egger_et al._<br>(2019)|
|**Coordination with monetary policy**|Accommodative monetary policy,<br>particularly under zero lower bounds|Cogan_et al._(2010); Coenen, Straub, and<br>Trabandt (2013); Eggertsson and Woodford<br>(2003); Eggertsson (2010), Christiano_et al.,_<br>(2011); Woodford, (2011); Fernandez‐<br>Villaverde_et al._(2015); Leeper_et al._(2017)|

_Source:_ Authors’ elaboration As Figure 2 illustrates, for most fiscal impulses, the magnitude of the multiplier substantially increases as the economy moves into a recession, the only exception being the tax multipliers. For all impulses other than tax changes, the point estimate of the multiplier strongly exceeds one in recessions, and for all expenditure types other than government consumption significantly so at the 5 percent level. The spending multiplier is significantly higher during downturns than during average periods or booms, both in statistical 8
<!-- Start of picture text --> TM@Max @Min X Mean<br>6<br>4<br>0<br>-2<br>-4<br>-6<br>Average Boom Recession<br><!-- End of picture text --> <!-- Start of picture text --> m Max m Min<br>2<br>15<br>1<br>0 = = — =<br>-0.5<br>-1<br>-15<br>Spending Investment Tax Transfer Deficit<br><!-- End of picture text -->
Evidence for higher spending multipliers during recessions or times of high unemployment is fragile, and most robust results suggest multipliers of one or below during these periods. Most of the state-dependent analyses are mainly conducted using nonlinear VARs, with shocks often identified by a Blanchard‐Perotti (2002) type of recursive strategy without taking external information on tax elasticities into account. Differently, Owyang et al. (2013) and Ramey and Zubairy (2018) employ local projections à la Jordá (2005) and exploit fiscal spending news shocks identified with a narrative approach to compute asymmetric multipliers in expansions and in recessions. Using the narrative approach, they find no evidence in favor of larger multipliers in bad times for the United States. This evidence, however, is found for Canada. Caggiano _et al.’s_ (2015) result on the acyclicality of fiscal spending multipliers is similar to the one in Ramey and Zubairy (2018). However, when extreme events (in particular, the Great Recession) are considered, the smooth‐transition VAR used by Caggiano _et al._ (2015) points to a large fiscal spending multiplier (about 2.5) which is much higher than the one normally associated with sustained booms. One of the key takeaways is that not all recessions are the same, and during deeper ones, higher returns may result from increasing public investment or consumption.

It is important to note that, while most of the literature has focused on the effects of positive fiscal spending shocks in booms and busts, recent evidence points to significant differences between the effects of positive and negative changes in fiscal spending. Barnichon and Matthes (2017) show that the contractionary multiplier – the multiplier associated with a negative shock to government spending--is above 1, and it is even larger in times of economic slack. In contrast, the expansionary multiplier --the multiplier associated with a positive shock – is substantially below 1 regardless of the state of the business cycle.

The evidence for higher government spending multipliers during periods in which monetary policy is very accommodative, such as zero lower bound periods, is somewhat stronger. Given the inability of most central banks to implement conventional policy easing (a costly inability, as empirically proven by, for example, Caggiano _et al._ 2017; Kulish _et al._ 2017; Liu _et al._ 2017), policy makers have experimented with expansionary policies such as unconventional monetary policy interventions or fiscal plans to stimulate their economies out of recession.

Let us consider Christiano _et al._ (2011) who study the effects of a binding zero lower bound on the fiscal spending multiplier in a medium‐scale New Keynesian framework (for other references, see Eggertsson and Woodford, 2003; Eggertsson, 2010; Christiano _et al._ , 2011; Woodford, 2011, Fernandez‐Villaverde _et al.,_ 2015; and Leeper _et al.,_ 2017). They show that the multiplier can be much larger than one. The reason is the following. An increase in spending leads to an increase in output, marginal cost of production, and expected inflation. The increase in expected inflation, given the zero level of the policy rate, drives the real ex‐ante interest rate down, which then boosts the multiplier. The value of the multiplier depends on many factors. Interestingly, the larger the output cost an economy experiences due to the presence of the zero lower bound (which limits the central bank's ability to tackle recessionary shocks in the first place), the larger the value of the multiplier.

While fiscal policy has often been studied in isolation, it is important to stress that its interaction with monetary policy is crucial for the determination of the size of the fiscal multipliers. Bianchi and Melosi (2017) model the interaction between monetary and fiscal policy with a micro‐founded regime‐switching DSGE framework featuring different possible monetary–fiscal policy mixes. Bianchi and Melosi (2019) show that a coordinated commitment to inflate away part of the debt can lead to welfare improvements and lower uncertainty because it separates the issue of long‐run debt sustainability from the need for a short‐ run fiscal stimulus.

Other relevant papers on the policy mix are the ones by Eusepi and Preston (2018a, 2018b). Using a DSGE model the authors find that stability (defined as the set of policies that ensures agents correctly learn the 10
long‐run objectives of the policy) is threatened when debt is high and of moderate maturity (between 2 and 7 years), which is indeed the maturity for most European countries.<sup>3</sup> This is a crucial policy message because most European countries (with the notable exception of the United Kingdom) feature high debt levels and average debt maturities falling within this range. Eusepi and Preston (2018b) show that, even under an aggressive monetary policy, debt levels and maturities comparable to the European ones would have prevented the US economy from the Great Moderation. Turning to the VAR empirical side, Rossi and Zubairy (2011) and Canova and Pappa (2011) show that fiscal multipliers tend to be larger when positive spending shocks are accompanied by a decline in the real interest rate.

A number of studies have looked at the size of multipliers under different macroeconomic conditions. After analyzing a quarterly data set on government expenditures for 44 countries (20 high-income and 24 developing) from 1960 to 2007, Ilzetzki _et al._ (2013) conclude that the fiscal multiplier is relatively large in economies operating under a predetermined exchange rate, but it is zero in economies operating under flexible exchange rates. They also find that fiscal multipliers are smaller in open economies than in closed economies and are zero in high-debt countries. The evidence, despite being intuitive, as a fixed exchange rate and the limited openness to trade may reduce potential crowding out effects, is however based on comparison between countries with different regimes rather than implying evidence _ceteris paribus_ on the shift from one regime to another for the same country.

Unfortunately, there is a substantially smaller number of studies that have focused on the determinants of the size of the public investment multipliers, particularly when it comes to developing countries, for which lack of long time series poses formidable challenges. Accordingly, crucial questions such as whether multipliers in lower-income countries should be expected to be higher or lower than in high-income ones remain still unaddressed (Batini _et al._ , 2014). Some studies suggest that multipliers are lower. These include studies finding that multipliers in lower-income countries are half the size of those in advanced economies (Sheremirov and Spirovska, 2019); are smaller in Sub-Saharan Africa than in advanced and emerging market economies (Arizala _et al._ , 2017); or are effectively zero (Kraay, 2010; Ilzetzki _et al._ , 2013). Other results are more optimistic, suggesting that public investment in developing countries would carry high returns. Namely, the theoretical notion according to which public investment multipliers should be higher or lower according to the size of the initial stock of public capital seem to be confirmed by Izquierdo _et al._ (2019). Finally, other studies suggest that one-time cash transfers in Kenya have been shown to have large impacts on consumption for recipients and large positive spillovers for non-recipient households and firms (Egger _et al._ , 2019).

The quality, quantity, and accessibility of economic infrastructure in low-income developing countries lags considerably behind those in advanced and emerging market economies (Gurara _et al._ , 2017). At the same time, public investment overall accounts for a larger share of the economy: 7.5 percent of GDP in the median low income countries, compared to 4.8 percent in emerging markets and 3.2 percent in advanced economies (Tandberg and Allen, 2020). Ganelli and Tervala (2016), modeling a public infrastructure investment shock with a temporary demand effect and a supply-side effect, the latter due to the fact that the productive capacity of firms increases with a higher infrastructure stock, find that the welfare gains of public infrastructure investment may be substantial. Notably, a dollar spent by the government for investment raises domestic welfare by the equivalent of 0.8 dollar of additional private consumption.

> 3 Typically, rational expectation‐DSGE models of inflation assign a dominant role to monetary policy and confine fiscal policy to the background. In the language of Leeper (1991), fiscal policy is ‘passive’, that is, it just determines the value of debt.

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# **_Other institutional factors affecting fiscal multipliers_**

There has been great interest in better understanding the effect of lack of efficiency on the size of the public investment multiplier, due to cost overruns, implementation delays (making the costs of the project higher or ‘wasteful’), poor project selection or allocation across sectors or simply due to the presence of corruption. <mark>A recent paper by Gurara</mark> _<mark>et al.</mark>_ <mark>(2020) looking at the association between cost inflation and public investment in a large sample of road construction projects in developing countries shows a non-linear U- shaped relationship between public investment and project costs. Unit costs increase once public investment is close to 10 percent of GDP. This threshold is lower (about 7 percent of GDP) in countries with low investment efficiency and, in general, the effect of investment scaling up on costs is especially strong during investment booms.</mark> Another strand of the literature identifies among the reasons that may explain the weak association between public investment accelerations and output growth the limited absorptive capacity (Horvat, 1958; Rosenstein-Rodan,1961). A first way to conceptualize absorptive capacity is in terms of declining marginal returns to public investment. In that sense, one could think that the output gains of additional public investment diminish as long as public capital is accumulated, so that the expected rate of return is declining with capital investment. A slightly different way to think about absorptive capacity is to relate supply bottlenecks with public investment dynamics. It has been argued that once the pace of investment (rather than the level) is above a certain threshold, countries do not have the capacity – in terms of skills, institutions, and management – to reap the benefit of additional public investment.

Last but not least, for infrastructure spending to be an effective economic stimulus requires the money to be deployed and create jobs while the economy is struggling. Large infrastructure investments have been often slow-moving projects requiring years to plan and execute. In a review of the 2009 stimulus in the US, Mallett (2020) notes that infrastructure projects were moving at a much slower pace than other types of stimulus leading to a lag in the economic impact. This last strand of literature emphasizes the need for “shovel ready” projects for guaranteeing an effective economic stimulus.

Large new infrastructure projects require design, engineering, permitting, and environmental reviews before construction can begin. Few projects are ready to break ground and start the labor-intensive construction phase quickly. Those that are ready can be delayed by federal involvement. In the US, “shovel ready” projects were delayed by a further year following the receipt of federal grants due to the need to pass through federal environmental and historical regulatory reviews, which forced layoffs as the contract was rebid and construction waited for federal approval (Michel, 2021).

Most jobs, especially infrastructure construction jobs, require skills specialization and training to be effective, safe, and efficient. Training unemployed workers without prior construction experience to expand payrolls temporarily is often not worth the time investment and high cost. There is also the risk that those firms accessing the stimulus funding are not those suffering more from the recession (Jones and Rothschild, 2020). Temporary stimulus programs seem more successful at shifting resources within industries than at expanding the industry itself.

Within this context increased maintenance spending may be a promising option for stimulus spending, as it may both create jobs (with corresponding income effects) and maintain the capital stock. There is likely to be substantial room for this across many lower-income countries as maintenance spending tends to be chronically under-budgeted. Maintenance spending is also one of the few areas of government consumption spending where increases can easily be made temporary without risking raising the long-term level of government spending (see the literature starting from Schwartz _et al.,_ 2007).

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# **2.3 Multipliers across Infrastructure Sectors**

The literature on fiscal multipliers has mostly focused on the overall effects of public investments and expenditures on growth. However, infrastructure spending is distinct from general public investment, and each infrastructure sector is unique in the way that it interacts with other sectors and in the contribution that it provides to the economy. Hence, the composition of infrastructure investment and expenditure also determines the size of the impact. So far, the literature estimating the effects of infrastructure components such as investments in transportation, energy, and ICT is not only much more limited, but also uses much less sophisticated tools than the ones we examined in the previous sections.

Within this last section, the concept of “multiplier” is different and simply captures the rate of return of infrastructure investment in terms of income, GDP or simply reports a crude estimation of the direct, indirect, and induced job creation of a given investment/spending in infrastructure. Indeed, this section reviews both the evidence related to income as well as job multipliers, as particularly during crises protecting or creating employment is of crucial relevance. Job multipliers capture the ratio of indirect and induced employment to direct employment created in the creation of an infrastructure asset.

**Table 3: Infrastructure Multipliers by Type**

|**Country &**<br>**Region**|**Author(s)**|**Infrastructure Type**|**Multiplier Type**|**Multiplier (direct and indirect**<br>**effects)**|
|---|---|---|---|---|
|Germany|Katz_et al_. (2010)|Broadband|Employment|1.45, 1.92*|
|Switzerland|Katz_et al._ (2008)|Broadband|Employment|1.38|
|United<br>Kingdom|Liebenau_et al._<br>(2009)|Broadband|Employment|2.76*|
|United States|Atkinson_et al._<br>(2009)|Broadband|Employment|3.60*|
|United States|Crandall_et al._<br>(2003)|Broadband|Employment|2.17*|
|United States|Katz and Suter<br>(2009)|Broadband|Employment|1.83, 3.42*|
|United States|Bivens (2003)|Communications|Employment|2.52|
|Malaysia|Bekhet (2011)|Electricity & Gas<br>Water works & supply<br>Building &<br>Construction|Employment|3.5*<br>2.4*<br>1.7*|
|United<br>Kingdom|Kelly_et al._<br>(2016)|(i) Electricity<br>production &<br>distribution<br>(ii) Land transport<br>(iii) Railway<br>(iv)<br>Telecommunications|Income|3.56, 5.56*<br>1.54, 2.40*<br>2.00, 3.10*<br>1.54, 2.41*|
|United States<br>|Pereira (2000)<br>|Transport (Highway)|Income|1.97 (long-run)|
|United States|Chi and Baek<br>(2016)|Transport|Income|0.55|
|United States|Leduc and<br>Wilson (2012)|Transport|Income|2.7 (Short-term)<br>6.2 (Long-term)|
|United States|Perotti (2004)|Transport|Income|1.47 (Short-term)<br>0.37 (Long-term)|
|Egypt, Arab<br>Rep.|Estache_et al._<br>(2012)|(i) Electricity<br>(ii) Construction &<br>Building<br>(iii) Transport &<br>Communications|Employment|1.06, 1.49*<br>1.36, 1.63*<br>1.34, 1.82*|

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|**Country &**<br>**Region**|**Author(s)**|**Infrastructure Type**|**Multiplier Type**|**Multiplier (direct and**<br>**indirect effects)**|
|---|---|---|---|---|
|United States<br>(Montana)|Comings_et al._<br>(2014)|(i)Photovoltaic<br>projects<br>(ii)Wind & energy<br>efficiency|Employment|5 - 9 jobs<br>1.5 jobs|
|United States|Crandall_et al._<br>(2007)|Broadband|Employment|293,000 jobs|
|World|<br>IEA (2020a)|Investment (for $1<br>million):<br>(i) Building retrofit,<br>efficient buildings, PV<br>(ii) Grids<br>(iii) Urban transport<br>and high-speed rail<br>(iv) Gas-fired plants|Employment|10 - 15 jobs<br>5 - 8 jobs<br>7 - 12 jobs<br>4.5 jobs|
|World|IEA (2020a)|Capital spending (for<br>$1 million):<br>(i) Solar PV<br>(ii) Wind power<br>(iii) Upgrades and<br>construction at<br>hydropower<br>(iv) Nuclear lifetime<br>extensions<br>(v) Biofuels and<br>recycling<br>(iv) New vehicles,<br>appliances and<br>batteries|Employment|3 constr & 6 manufacturing<br>jobs<br>1 constr & 1.5 manufacturing<br>jobs<br>3 jobs<br>2-3 jobs<br>11 – 12 jobs (advanced<br>economies), 29 - 46 jobs (the<br>rest of world)<br>6 – 9 jobs (advanced<br>economies),<br>9 – 15 jobs (the rest of the<br>world)|

*includes induced effects in addition to direct and indirect effects

_Source:_ Compiled by authors Table 3 presents the income and employment multiplier results for studies focusing on different countries for the various sub-components of infrastructure investments. Despite the broad variation in estimates across countries, and the fact that a small number of studies refers to developing countries, we can draw a few general insights. Low employment multipliers are typically associated with sectors with high wages and with relatively complex, capital intensive projects whereas sectors with low wage employees and low material costs usually generate high employment multipliers (International Energy Agency, IEA, 2020a).

Transportation spending has often played a prominent role in government efforts to stimulate the economy during downturns. For instance, of the estimated US$ 825 billion over ten years in the American Recovery 14
and Reinvestment Act of 2009, about two-thirds came from increased federal government spending, with the Department of Transportation receiving US$ 48 billion.<sup>4</sup> Chi and Baek (2016) document the bidirectional relationship between transport infrastructure and GDP for the period 1960-2012. Their findings suggest that expanding transport infrastructure improves aggregate economic output, and enhanced economic output increases public investment in transport infrastructure in the period. However, the magnitude of the impact of transport infrastructure (0.55) on GDP is smaller than that of non-transport public infrastructure (1.02), implying that non-transport infrastructure investment is a more effective long-term fiscal stimulus than expanding transport infrastructure.

Pereira (2000), based on the US highway spending data for the period between 1956 and 1997, finds a long term multiplier of 1.97 for investment in transportation infrastructure (the lowest across different types of infrastructure investments) well below 4.5, the long run multiplier for total public investment. This finding implies a 3.4 percent rate of return on public investment in transportation infrastructure. Similarly, Leduc and Wilson (2012) estimate 2.7 and 6.2 for the short- and long-run multiplier for the period 1993-2010, while Perotti (2004) finds 1.47 in the short-run and 0.37 in the long-run for the period 1960-2001.

Turning to the energy sector, the report of Blyth _et al._ (2014) surveys the literature on the employment effects of selected policies and note that renewable energy has a higher jobs multiplier in the short run, while it requires less labor for operation and maintenance in the long-run. Comings _et al._ (2014) show that for each megawatt of renewable energy capacity added, photovoltaic projects would add 5 to 9 jobs depending on the size of the project. The contribution of wind projects, on the other hand, is around 1.5 jobs for each megawatt of capacity added.

Broadband infrastructure has been identified as an important area of public investment during an economic downturn in several studies. Due to the scope for user-funded private finance in the telecommunications sector, broadband investment tends to make much smaller demands on public expenditure. Spending initiatives on next-generation telecommunications networks at a time when labor market conditions are particularly weak can help preserve jobs and head off a potential burden on social safety nets. Bringing forward longer-term aggregate spillover effects of broadband can improve the productivity of the entire economy and is consistent with enhancing long-run growth and development. Public support also "crowds in" private investment when access to private financing is decreasing and more expensive.

Investing in broadband and next-generation networks, as a counter-cyclical tool, creates jobs and provides the foundation for economic recovery and long-term sustainable growth (Qiang, 2010). IT infrastructure projects create more jobs than traditional infrastructure investments, in part because of the network multiplier, they also create better jobs in terms of higher skill and higher pay. An additional $10 billion broadband investment would create about 64,000 direct jobs in telecommunications and 116,000 jobs (multiplier of 3.60) in related industries (Atkinson, 2009). Crandall _et al._ (2003) estimate the employment impact of a $63.6 billion investment in broadband deployment aimed at increasing household adoption from 60 percent to 95 percent. They find 140,000 jobs (a multiplier of 2.17) are created per year over ten years.

Jobs in the communications sector in the US economy have an employment multiplier of 2.52 (Bivens, 2003). This indicates that the 50,000 service jobs created by a $10 billion broadband stimulus package create an additional 125,500 jobs. The multiplier for manufacturing jobs is 2.91. Hence, the 13,800 communications/computer equipment manufacturing jobs created to support an additional 40,000 indirect and induced jobs. Crandall _et al._ (2007) find that for every 1 percentage point increase achieved in

> 4 Similarly, Japan initiated a series of stimulus packages with a significant emphasis on spending for public work (among which spending on roads figured prominently) during the stock market collapse in 1989 (Leduc & Wilson, 2014).

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broadband penetration, employment rises from 0.2 to 0.3 percent, or about 293,000 jobs for an economy at less than full employment.

Strand & Toman (2010) discuss the short-run and long-run effects of green stimulus efforts. They find that most green stimulus programs that have large short-run employment and environmental effects are likely to have less significant positive effects for long-run growth, and vice versa. This is because programs that create more (less) job opportunities tend to employ lower- (higher-) skilled workers, and therefore yield smaller (larger) long-term growth effects. For example, most jobs in the wind or solar PV sector are highskilled; investment in these sectors can contribute substantially to future technical development and growth. Most jobs in solar-thermal and biomass production are by contrast lower-skilled, with less scope for technological enhancement and learning effects for the individuals employed. One-fifth of employees in clean-energy production and energy-efficient occupations have college degrees (Muro _et al._ , 2019).

By the same token, capital-intensive investments such as digitalization and 5G are more likely to show economic benefits over the longer term and therefore much less likely to create strong short-term stimulus effects. Strand and Toman’s (2010) analysis implies a tradeoff in many cases between skill levels and labor intensities, reinforcing the point that different instruments are needed for addressing different problems. A recent paper by Hepburn _et al._ (2020) based on expert surveys also shows that there are limited policy options that generate both large economic multipliers and climate impact.

Despite the recognition of limited availability of triple win-win-win opportunities, countries that invested the most in green stimulus after the Great Recession such as the United States, Germany, and the Republic of Korea boosted their economies and created jobs. The green stimulus supported 900,000 job-years in clean energy fields from 2009 to 2015 in the United States, and 156,000 new green jobs from 2009 to 2011 in Korea. Korea included green measures in almost 80 percent of the stimulus in the fourth quarter of 2008. Almost one-half of the stimulus targeted energy-efficient projects and low carbon vehicles (UNEP, 2009; Jaeger, 2020). The 2008 Green New Deal Stimulus in Korea estimated to generate 960,00 jobs in energyefficient and low-carbon energy sectors such as energy conservation in villages, fuel-efficient vehicles, expanding mass transit, and railroads (Barbier, 2010; Robins _et al._ , 2009).

Green construction projects, such as insulation retrofits or clean energy infrastructure, can similarly deliver higher multipliers. These large construction projects are less amenable to offshoring via imports (Jacobs, 2012). Clean energy infrastructure is also labor intensive in the early stages – Garrett-Peltier (2017) suggests that every US$ 1 million spent generates 7.49 full-time jobs in renewables infrastructure, 7.72 in energy efficiency.

In the European Union, each US$ 1 in green investment boosted GDP by up to $1.50 across the region (Cambridge Econometrics, 2011). In China, rapid investment in railways, grid networks, and other green initiatives boosted the GDP abound 4.2 percent above the baseline in 2009 and 3.6 percent above the baseline in 2010 (Cambridge Econometrics, 2011). There were around 400,000 jobs in low carbon businesses and their supply chains in the UK in 2017. The offshore wind sector in which 7,200 people were employed in 2019 is such an example. Energy efficiency is identified as a job-intensive form of clean energy investment for the post-crisis stimulus (IEA, 2020b). Capital-intensive clean energy infrastructure in technologies represents a prospect for long-term employment (KPMG, 2020). These public investments offer high returns in the long run (Henbest, 2020) and could serve to kick start green innovation ecosystems (Acemoglu _et al._ , 2012). At the same time, adoption of green technologies could create higher spillovers by driving an efficient, innovative, and productive economy (Aghion _et al._ , 2014).

In addition, compared to traditional stimulus, green stimulus, in many cases, has been singled out as more effective in creating jobs. Spending on public transit in the United States led to 70 percent more job-hours than equivalent spending on highways. Job intensity is estimated at 8 jobs per US$ 1 million invested in 16
green electricity, 2-13 jobs in efficient new buildings such as schools and hospitals, and 6-14 jobs in green water and sanitation through efficient agricultural pumps and recycling in advanced economies (IEA, 2020a; Popp _et al._ , 2020). Each US$ 1 million of green ARRA created 15 new jobs in the post ARRA period of 2013-2017 (Popp _et al._ , 2020).

# **2.4 Summary of Evidence on the Impact of Fiscal Multipliers**

The key lessons learned from the literature review conducted so far indicate that fiscal multipliers estimates are highly sensitive to different modeling and methodological choices as well as even more innocuous choices such as the time period considered in the analysis.

Whereas in general public investments are characterized by the highest multiplier, during downturns or times of unemployment, transfers may represent a more powerful source of fiscal stimulus. However, not all crises are the same, and for some of the deeper ones, such as the Great Depression, spending and investment multipliers are still greater than one. Evidence on other macroeconomic “states” is not robust, with the most notable exception of a coordinated fiscal and monetary policy, especially under interest rates close to zero. Other institutional factors play a crucial role in determining the size of the public investment multiplier, in particular the country’s absorptive capacity, and the selection of high-quality shovel ready projects.

However, relatively little is known about the size of public investment multipliers for developing countries and emerging economies (mainly due to data constraints) and the existing evidence is mixed. Furthermore, there is scant knowledge on the specific impact of investments in infrastructure. The limited evidence available is less rigorous and focuses on estimates of the rate of returns of investment in transport, energy and digital. Although results vary extensively, on average the strongest evidence for larger multipliers is associated with energy efficiency retrofits and road maintenance in the near term, and broadband infrastructure in the longer term.

Green investment in infrastructure seems to have higher multipliers and may have the potential to create jobs in the short-run (since it is labor-intensive in the early stage) and higher investment returns in the longrun (align with energy security and climate goals). Countries that invested the most in green stimulus after the Great Recession boosted their economies and created jobs. However, the trade-off between short- and long-term impacts as well as between skill-levels and labor-intensities need to be carefully considered.

# **3. Fiscal Stimulus Programs during Crises: Historical Experience**

As the COVID-19 pandemic brings the world economy into a downturn, governments around the world are looking back at the lessons learned from the global experiences from the historical crisis to reduce the severity of the current one. Many countries have used fiscal stimulus programs to attempt to assist the economic state of their countries during crises. However, the composition of fiscal stimulus packages differs across regions and countries, depending on the magnitude and type of impacts of the economic crises, the degree of integration, and other related factors. In this section, we discuss the historical experience.

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# **3.1 The Great Depression**

The Great Depression was triggered in the United States by the Wall Street crash in October 1929 and became worldwide. It resulted in a massive loss of income, record unemployment rates and output loss, especially in industrialized nations. In the United States unemployment hit almost 25 percent at the peak of the crisis in 1933.

In the United States during the Great Depression, a large fiscal stimulus package was introduced to increase funds to public works. Noticeably, the Federal Reserve slashed interest rates down to zero in an attempt to manage the negative real effects of the financial crisis. The New Deal used historic spending to fund entirely new categories of forward-looking projects: delivering clean water, electricity, and telephone service to people for the first time; demonstrating mega-project capabilities such as New York City’s Lincoln Tunnel; and reinvigorating the civic commons through projects such as San Antonio’s River Walk and Charleston. Programs such as the Works Progress Administration<sup>5</sup> and the Tennessee Valley Authority were key elements of the government’s economic stimulus. The Works Progress Administration granted state and local government funds to provide work relief and direct relief and to build and maintain infrastructure. The Tennessee Valley Authority provided jobs and electricity to the rural Tennessee River Valley that spans seven states in the South as a part of Depression-era New Deal programs. In addition, Congress passed a series of infrastructure bills to build major bridges, roads, and other improvements such as Hoover Dam in Nevada and the Golden Gate Bridge in California. The bills not only met the needs of modernization but also supplied jobs during the crisis. About 85 percent of the grants were used to hire the unemployed on work relief jobs. These jobs include maintenance activities such as building sidewalks, local roads, schools, and improvements in the local infrastructure (Fishback _et al._ , 2004).

Using data on New Deal Grants to each US county from 1933 to 1939, Fishback _et al._ (2005) estimate how relief and public works spending and payments to farmers through the Agricultural Adjustment Administration influenced retail consumption. They find that an additional dollar of public works and relief spending was associated with 44 cents increase in 1939 retail sales. This implies a weak effect of fiscal policy consistent with results from Romer (1992).

Similarly, Fishback and Kachanovskaya (2011) examine the impact of federal stimulus programs and find that state per capita personal income multiplier with respect to per capita federal grants is around 1.1. In another study, Fishback and Kachanovskaya (2015) estimate that an added dollar of federal spending in the state increased state per capita income by between 40 and 96 cents by using an annual panel data set for the period 1930-1940.

Federal grants had stronger effects on consumption than on personal income, but they had no positive effect on various measures of private employment. The multiplier for wages, salaries, and retail sales is substantially less than one indicating “crowding-out”. The multiplier for farm payments to take land out of production was -0.57 (Fishback and Kachanovskaya, 2011). This implies that the program actually reduced personal income. These results may help to explain why measures of income have recovered more rapidly than measures of employment in the 1930s. Based on these findings, the New Deal spending might have raised the productivity of local producers if it was devoted to building infrastructure that cut transport costs to other areas (Fishback and Kachanovskaya, 2010).

> 5 Renamed as Works Projects Administration in 1939.

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# **3.2 The Asian Crisis of 1997**

The Asian Crisis originated in Thailand in 1997 and quickly spread to the rest of East Asia and its trading partners. It was a currency crisis. In July 1997, the Thai government had to abandon its fixed exchange rate against the US dollar that it had maintained for so long, citing a lack of foreign currency resources. Among others, Indonesia, Korea, and Thailand were affected the most. Relatively less impacted were countries, including Brunei, China, Singapore, Taiwan, China, and Vietnam, however, also suffered from a sharp decline in demand in the region.

Infrastructure PPP investments and the number of projects in transport and energy sectors declined substantially soon after the Asian Crisis in the East Asia and Pacific (Figure 4). Currency conversion risk in infrastructure financing projects translated into reduced government willingness to provide explicit guarantees for projects in the period following the crisis. The investments in the region were also affected during the Global Recession but the impact was relatively smaller.

**Figure 4: Greenfield Transport and Energy Investment (by US$ and number) in East Asia Pacific**

<!-- Start of picture text --> 1990 2000 2010 2020 1990 2000 2010 2020<br>125<br>40000<br>100<br>30000<br>75<br>20000<br>50<br>Number of Projects<br>Real Investment (USDm)<br>10000 25<br>0 0<br><!-- End of picture text --> _Source:_ Authors’ calculation based on private investment in infrastructure database (https://ppi.worldbank.org/en/ppi). Vertical lines represent 1997-98 Asian Crises and 2008-09 Great Recession. This figure shows the total number of greenfield projects in transport and energy sectors for the period 1990-2019 in the East Asia and Pacific countries. There is a sharp decrease in the number of projects and associated investment starting with the Asian crises in 1997, which continues till 2000. Countries included in the analysis: Cambodia, China, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, Papua New Guinea, Philippines, Solomon Islands, Thailand, Timor-Leste, Tonga, Vanuatu, Vietnam.

The 1997 Asian financial crisis seriously hampered infrastructure investments. In the case of Indonesia, public infrastructure investment fell dramatically after the crisis, to about 1 percent of GDP in 2000. Even a decade after the crisis, total public infrastructure investment—public, state-owned enterprises and private sector combined—stood at 3.4 percent of GDP, which is still significantly below pre-crisis levels of around 5 to 6 percent of GDP, leading to a ‘lost decade’ in infrastructure investments since then. More broadly, the Indonesian government failed to invest sufficiently in its economy and the public investment rate became one of the lowest among middle-income countries. Total investment, both public and private, declined from 27 percent of GDP in 1996 to less than 20 percent in 1999. There was even sharper decline in the public development spending -- a proxy for public investment. It declined from 6.5 percent of GDP in 1996 to around 4 percent in 2000 (World Bank, 2007). In countries such as Indonesia and Korea where public austerity prevailed, public works programs were used in the attempt to provide targeted income support to the poor. However, many flaws were discovered during the implementation of such projects. For example, in Indonesia, nearly two-thirds of the poor did not participate in the projects (World Bank, 2000).

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Some Asian countries adopted an economic package with a focus on infrastructure investments. For instance, China implemented an ambitious infrastructure investment program worth approximately US$ 12 billion for the period 1998-2000 to relieve the binding constraint on growth, with a focus on roads and highways, which in turn opened up the interior region to more commerce. Japan’s US$ 127 billion stimulus package is yet another example that targeted spending on infrastructure projects mainly for science, technology, and telecommunications (Richardson, 1998). In addition, Japan also announced a scheme of a special yen loan facility of a maximum amounting to a total of up to 600 billion yen (approximately US$ 5 billion) to contribute to economic structural reforms in the wider East Asia region by promoting the infrastructure developments.<sup>6</sup> There is macroeconomic evidence documenting the fast recovery in some of the countries in the region that implemented fiscal stimulus packages, but more detailed evidence on the assessment of multipliers is scarce. In the case of China, improvements in the highway system, port facilities, telecommunications, and education helped the economy to get out of deflation in 2003 and increased the average growth in GDP. This was followed by an increase in government revenue that allowed public debt to decline from about 30 percent of GDP in the 1990s to about 20 percent in 2007 (Jha, 2009). Despite the large and decisive fiscal stimulus in the 1990s (7 percent of GDP per year on average), Japan continued to face an ongoing challenge of promoting faster economic growth. Chari and Henry (2015) show that the divergence in recoveries does not depend on the size of fiscal stimulus but also on its persistence. Unlike Europe, some East Asian countries continued to implement stimulus in response to the Asian Financial Crisis of 1997 until growth recovered. On the other hand, large and rapid fiscal consolidation in Europe exerted a strong, negative impact on growth.

# **3.3 The Great Recession**

The Great Recession (also referred to as the financial crisis of 2008-2009) started with the bankruptcy of a US investment bank, Lehman Brothers, followed by an unprecedented dislocation of financial markets. It severely hit the stability and confidence of financial systems. To ease the negative economic impacts of the 2008-2009 financial crisis, many countries implemented fiscal stimulus packages. As each country responded differently to the 2008-2009 global crisis, the impacts of their fiscal stimuli are unique as well.

Countries such as the Russian Federation and the United Kingdom mostly focused on tax cuts, while spending measures were the main focus in countries like Argentina, China, and India. Expansion of social security benefits by increasing spending on public health and unemployment benefits (Canada, France, Russia, the United Kingdom, and the United States), cash transfer programs (Brazil, Canada, Chile, France, Italy, Japan, Mexico, and Korea), pensions (Argentina, Australia, Canada, and China) and extending concessional loans to low-income citizens (Saudi Arabia) are some of the mostly preferred components of stimulus packages (Jha, 2009). Infrastructure investment programs were parts of the stimulus programs that were enacted in the wake of the 2008-09 financial crisis to bolster economic conditions, with the share allocated to infrastructure varying substantially across countries (Figure 5).

> <sup>6</sup> Ministry of Foreign Affairs of Japan (2000). https://www.mofa.go.jp/policy/economy/asia/crisis0010.html (Accessed in September 21, 2020). During the crisis, there had been pressure on Japan to stimulate its economy and increase its imports from the region to contribute to economic recovery of other Asian economies. Sales to Japan account for 12 percent of Malaysia’s GDP, and in the range 5 to 7 percent for Indonesia; Korea; Taiwan, Chian; and Thailand (The Economist, 1998).

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down private-sector non-ARRA-funded work, highlighting the fact that government spending was directly competing with private activity. The same researchers found that “rehiring of laid-off workers was rare,” with only 4.4 percent of their surveyed workers being rehired after a layoff. Almost half (47 percent) of the measured ARRA-created jobs were filled from the ranks of the already employed at other competing firms (Jones and Rothchild, 2020). Federal dollars also crowded out state and local project funding, by allowing recipient governments to decrease own-source funding on infrastructure and reduce debt issuances or fund other priorities.

The impact of the temporary value-added tax (VAT) cut has also been documented and found to be small and not be long-lasting. A prediction of Barrell and Weale (2009) indicates that a 2.5 percent reduction in VAT (from 17.5 percent to 15 percent) in the United Kingdom is likely to result in consumption being augmented by less than 1 percent by the fourth quarter to 2009. This contributes less than 0.5 percent to GDP compared to the case without the VAT increase. Moreover, after the temporary reduction is over, both consumption and GDP are depressed as a result of the policy.

In addition to tax reductions, fiscal stimulus packages in many countries consisted of transfers to households and expenditures on public works. Australia is such an example. As a part of stimulus, 21 billion household payments were delivered between December 2008 and May 2009, and 40 percent of households who received a payment spent it (Leight, 2012). This rate is high compared to the records in surveys assessing the 2001 and 2008 tax rebates in the United States and indicates that people are more likely to spend “bonuses” than “rebates”.

Giesecke and Schilling (2010) highlighted the importance of a package more targeted at employment promotion to increase the effectiveness of the fiscal stimulus. New Zealand’s fiscal stimulus package, for instance, largely comprised three policies: cuts to personal income taxes; cuts to business taxes; and increased infrastructure spending (0.3 percent of GDP for 3 years; 2009-2011). However, it had a small impact on employment – around 10,000 jobs- in the short-run, at a cost to long-run consumption (Giesecke and Schilling, 2010).

In sum, governments all over the world eventually introduced budget measures intended to provide fiscal stimulus to the economy, often including some component of infrastructure spending. However, the limited evidence available suggests that these measures met with only varying degrees of success. Table A1 in the Appendix provides more details of fiscal stimulus programs mainly discussed here.

# **3.4 Summary of Evidence on the Impact of Fiscal Responses to Major Macroeconomic Crises**

A comparison of the Great Depression of the 1930s with the Great Recession of 2008-2009, in the specific case of the US where more evidence is available, we can draw a few lessons.

First of all, resilient recovery requires smart policy decisions and balancing of sometimes conflicting objectives: accelerating shovel ready projects (to create and maintain employment in the short run) and spending on innovative programs (as part of the next wave of digital and resilience efforts). Within this context, the ARRA used a hybrid approach, differently from the fiscal stimulus used during the Great Recession. Some infrastructure funding went into preexisting programs. But ARRA also launched innovative digital programs such as the National Broadband Plan and Broadband Technology Opportunities Program as well as green programs (renewable generation, weatherization, and even new green financing models). Those innovative programs now serve as models for the next wave of digital and resilience efforts.

In terms of estimated results, the impact of federal grants during the Great Recession are mixed, with a stronger impact on consumption, and a negligible (sometimes even negative impact) on state per capita 22
income, due to the presence of significant crowding out. Public works and relief spending also generated a weak multiplier. The wide range of multipliers for infrastructure spending, ranging from 0.4 to 2.2 for the ARRA programs reveal a disagreement among economists about the effects of new spending, but can also be interpreted as the differential impact of different types of investments some with short-run shovel ready impact and others more oriented towards innovation and boosting longer-run growth. The employment effects of ARRA were relatively modest, but nevertheless, transportation funding allowed state and local governments to maintain employment in the transportation construction sector as well as in other sectors.

Despite more limited evidence, the Asian crisis also provides a few lessons. The resulting fiscal austerity regime led to a ‘lost decade’ in infrastructure investments for many Asian countries. In countries such as Indonesia and Korea, where public austerity prevailed, public works programs did lack targeting, and failed to reach the poor who did not participate in the projects (World Bank, 2000 ). Unlike Europe, the few East Asian countries that implement stimulus continued to do so until growth recovered, which led to a stronger recovery. The large and rapid fiscal consolidation in Europe, instead, exerted a strong, negative impact on growth.

# **4. Assessing the Impact of COVID-19 and Recent Infrastructure Programs**

Of course, no crisis is the same. Nevertheless, the COVID-19 recession lands at an ideal time to learn from these past stimulus programs. In fact, comparing historic crises with the economic crises induced by the 2020 COVID-19 global pandemic, there are at first sight some reasons to expect that spending might have smaller multipliers. First, if the uncertainty in the current crisis is deeper than in previous crises, individuals and firms could engage in more precautionary behavior, hoarding cash. Second, if fear of COVID-19 means that people choose not to engage in travel and social activities, efforts to stimulate economic activity will be less effective. Third, it may be difficult to target government injections to where there is a high marginal propensity to spend. Fourth, the impact on expectations may be shaped more by emerging health risks than by financial responses (Stiglitz, 2020). Additionally, employment impacts are very different with construction unemployment rates almost half those of the harder-hit service-sector industries that have been most negatively affected by the pandemic restrictions (US Bureau of Labor Statistics, 2021).

Although, the lessons learned from the literature would point to the higher effectiveness of providing transfers rather than engaging in new investments during such a severe recession as COVID-19. The coexistence of extremely low interest rates provides exactly the monetary policy setting in which investment and spending are known to deliver the highest multipliers. Since the pandemic is still ongoing and there is yet no relevant literature, the purpose of this section is to reflect on what the earlier literature could mean in the current context.

The peculiarity of the COVID-19 crisis also has implications for the prioritization of different types of infrastructure spending as part of any fiscal stimulus. Availability and access to infrastructure in many developing countries have become more urgent amid the threat of COVID-19. The ability to mitigate immediate health risks is often compromised by a lack of access to sanitation and public health infrastructure. In 27 Sub-Saharan African countries, almost 60 percent of health center facilities are without access to electricity (IEA, 2019a), and over 860 million people worldwide lack access to electricity, severely limiting their ability to store medicines and food, charge phones, access digital information, maintain access to education remotely or light their homes effectively (IEA, 2019b). Power outages and blackouts could cost lives and be detrimental to critical medical equipment. Interruption of supply chains for transport service could equally threaten the basic minimal delivery of food, fuel, medical supplies as well as the movement of critical workers that keep the economy functioning.

23
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A few emerging policy recommendations on the effectiveness of countercyclical fiscal policies against the current COVID-19 crisis are explored. There are several reasons why COVID-19 spending might have smaller multipliers, including more precautionary behavior, hoarding cash, amplified by fear that people choose not to engage in travel and social activities, so that efforts to stimulate economic activity will be less effective. At the same time, a countervailing consideration is that many countries are also facing the kind of loose monetary policy conditions that help to increase the efficacy of fiscal stimulus.

Two types of infrastructure investments look to be of particular relevance to recovery from the COVID-19 crisis. The first is digital technologies, which have come into their own to support economic and social resilience while complying with public health directives on social distancing. Accordingly, the demand for digital goods and services has soared across the public and private sectors and exposed major deficiencies in the availability and performance of broadband infrastructure. The second category is green infrastructure, which offers relatively good performance on job creation, while at the same time shifting economies to lower carbon emission trajectories in the context of increasingly pressing global climate targets. Investments such as rural electrification, public transport, energy efficiency and renewable energy offer the possibility of contributing simultaneously to economic, environmental and social goals.

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|Country/Region|Authors|**Table A1**<br>Data|**:Experience of 2**<br>Time Coverage|**009 Stimulus Around the World**<br>Stimulus|<br>Findings|
|---|---|---|---|---|---|
|Australia|Li & Spencer (2016)|Output growth rate,<br>inflation, domestic interest<br>rate, growth rate of<br>government transfer<br>payments (quarterly)|March 1993-<br>December 2013|More active spending measures- transfers<br>to households and expenditures on public<br>works|Stimulus transfers were almost equally important as the<br>concurrent monetary easing actions in helping the economy to<br>avoid recession|
|Australia|Leight (2012)|<br>Household survey data|December 2008 -<br>May 2009|US$ 21 billion household payments<br>between December 2008 and May 2009|40% of households who received a payment spent it indicating<br>individuals are more likely to spend “bonuses” than “rebates”<br>as in the US|
|Australia|Buddelmeyer&Peyton<br>(2014)|Expenditure data for 62<br>local government area and<br>electronic gaming<br>machine data|July 2004 - June<br>2012|Lump-sum cheques sent to households as<br>compensation for the introduction of<br>Carbon Tax|Increased spending in electronic gaming machine in<br>December 2008 amounted to 1% of total stimulus for that<br>period.<br>Individuals are more likely to spend “bonuses”|
|China|Xiang_et al._(2019)|Sample of 143 banks<br>(including the big five,<br>joint stock, city, rural and<br>foreign)|2006-2013||the effect of the 2007 Global Financial crisis and the 2009<br>stimulus package on various overall and segment efficiencies<br>is inconsistent & inconclusive|
|New Zealand|Giesecke & Schilling<br>(2010)|<br>Real consumption,<br>investment, public<br>consumption, export &<br>import volumes,<br>employment real wage<br>terms of trade|October 2008-<br>March 2009<br>(with predictions till<br>2017)|Cutting to personal income & business<br>taxes and infrastructure spending (0.3%<br>of GDP for 3 years; 2009-2011)|Small positive impact on short-run employment with a gain<br>around 10,000 jobs but at a cost to long-run consumption|
|Thailand|Muthiacharoen_et al._<br>(2019)|Account-level loan data<br>(loan composition and<br>history, demographic<br>information)|December 2009-<br>March 2016|Car-buyer tax rebate during 2011-2012|The design of durable goods stimulus policy should focus<br>more on productive business durables than on consumer<br>durables since it may lead to excessive debt burden and create<br>an adverse consequence in the longer term|
|The Caucasus,<br>Central Asia and<br>Mongolia|Mitra (2010)|<br>Macroeconomic indicators<br>(GDP growth, current<br>account balance, terms of<br>trade, loan to deposit<br>ratio...)|2000-2009 (main<br>focus)||<br>Need for more concessional financing to moderate the<br>tradeoff between stimulus and sustainable debt levels.<br>Importance of distressing in the banking sectors through<br>liquidity support and deposit guarantees|
|Turkey|Misch & Seymen<br>(2019)|<br>Financial Crisis Surveys<br>Data, change of sales of<br>firms, additional firm<br>specific controls (number<br>ofemployees, share of|2009-2010|Cutting the value added tax and special<br>consumption tax in the first quarter of<br>2009|Positive and robust effects of consumption tax cuts on the<br>change of firm sales|

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|||exports, received state aid<br>or not...)||||
|---|---|---|---|---|---|
|Turkey|Taymaz (2010)|Changes in domestic<br>demand for passenger and<br>changesinexports|2008-2009|Special Consumption Tax reduction on<br>motor vehicles|Special consumption tax cuts increased automobile sales and<br>domestic automobile production|
|United Kingdom|Barrell & Weale<br>(2009)|Aggregate consumption<br>data (quarterly)|1992-2010<br>(with a focus on<br>2009-2010 period)|Temporary VAT cut|A2.5% reduction in VAT is likely to result in consumption<br>being augmented by less than 1% by the fourth quarter to<br>2009. GDP is likely to be raised less than 0.5% relative to the<br>case without the VAT increase.|
|United States|Taylor & O’Sullivan<br>(2017)|Real per capita federal<br>expenditures, government<br>revenue|11 postwar<br>recessions<br>(1948-2015)||Fiscal stimulus polices should follow three T’s—timely,<br>targeted, and temporary: (1) it took 10.9 months on average<br>before a recession’s start and the first major countercyclical<br>fiscal policy action. (2) The stimulus was not temporary in the<br>4/8 recessions where fiscal policy was attempted. (3) In many<br>cases recessions provided politicians an avenue in which to<br>implement policies that were part of their long-run reform<br>agenda rather than being carefully targeted countercyclical<br>fiscal policy.|
|United States|Mian & Sufi (2012)|957 U.S. metropolitan or<br>micropolitan statistical<br>areas (CBSAs) for|January 2004 -June<br>2010|The Car Allowance Rebate System<br>program - temporary subsidies to<br>encourage the trading in old cars and<br>buying new ones|<br>Program induced the purchase of an additional 370,000 cars in<br>July & August 2009.<br>reversal impact 10 months after the program expired|
|United States|Chodorow-Reich_et_<br>_al._(2012)|State level income and<br>employment|December 2008-<br>July 2009 (main<br>focus)|$88 billion of aid to state governments<br>through the Medicaid reimbursement|Positive relationship between receiving fiscal relief and<br>increases in employment|
|Europe<br>(17 countries)|Nickel and Tudyka<br>(2014)|Real GDP, government<br>consumption, private<br>investment, debt-to-GDP<br>ratio, trade balance|1970-2010||A one percentage point of GDP increase (expansionary fiscal<br>shock) in government consumption is first followed by<br>positive cumulative responses of real GDP and negative<br>responses of private investment and the trade balance as a<br>share of GDP|
|G20|Spilimbergo,<br>Symansky, and<br>Schindler (2009)||2008 Global crisis||The low set of fiscal stimulus multipliers included 0.3 on<br>revenue, 0.5 on capital spending and 0.3 on other spending|
|World|<br>Agnello_et al._(2017)|Panel of 157 countries<br>(Gini, real GDP growth<br>rate, fiscal stimulus<br>packages)|1960-2010||An increase in inequality increases the probability of<br>government crises. However, this impact is decreased when<br>expansionary fiscal stimulus episodes are in place.|
|World|Aizenman & Jinjarak<br>(2011)|<br>Size of fiscal stimulus,<br>exchange rate<br>depreciation, trade<br>openness,fiscalcapacity|2007-2009<br>(main focus)||A lower debt/average tax base is associated with higher fiscal<br>stimulus and lower trade openness is associated with a higher<br>fiscal stimulus and lower depreciation rate during the crisis|

39