Research Feature - August 2023

The public investment multiplier in a production network

Alessandre Peri, Omar Rachedi and Iacopo Varotto

Abstract. Aggregate and sectoral effects of public investment crucially depend on the interaction between the output elasticity to public capital and Input-Output linkages. We uncover this fact through the lens of a New Keynesian production network. This setting doubles the socially optimal amount of public capital relative to the one-sector model, leading to a substantial amplification of the public-investment multiplier. We also document novel sectoral implications of public investment. Although public investment is concentrated in far fewer sectors than public consumption, its effects are relatively more evenly distributed across industries. We validate this model implication in the data. Click here File PDF: Opens in new window (191 KB).