Public Investment Multipliers by Functions of Government: An Empirical Analysis for European Countries

This paper contributes to the scientific and political debate on public investment multipliers by estimating them according to their respective function of government. The analysis is conducted on a sample of 31 European countries over the period 1995-2019 and uses the local projection method to estimate the multipliers. Total public investment is confirmed to have a persistent and robust multiplicative effect on GDP, in line with the findings of previous literature. Moreover, public investment seems to be particularly effective in fostering economic growth when it supports the creation of human capital and the functioning of economic affairs and public services, which also includes basic R&D and the operability of public institutions. Such effects appear to be stronger in the post-2008 period, where significant multiplicative effects are found also when resources are invested in other functions of government such as the promotion of health, public order and safety. Our results can help informing the current debate on the selection of specific allocation of public resources to favor a faster GDP recovery after the pandemic shock.