The Central Bank of Latvia has published a working paper estimating that the cumulative public investment multiplier in European economies reaches approximately 2.1 after five years, with most of the effect materialising within the first two to three years. The multiplier is significantly larger during recessions, when public debt is low and when the existing stock of public capital is relatively low. The analysis covers 23 European countries over 2002–2023 and uses the European Commission’s public investment forecast errors to identify investment shocks, addressing challenges associated with anticipation and endogeneity. Measuring those errors in real monetary terms, rather than as differences between forecast and realised investment-to-GDP ratios, avoids distortions arising mechanically from changes in the GDP denominator. The cumulative multiplier compares the accumulated output response with the accumulated change in public investment, capturing spending effects that persist beyond the initial shock.
Central Bank of Latvia research estimates public investment multiplier of 2.1 after five years in European economies
A Central Bank of Latvia working paper covering 23 European countries estimates that the cumulative public investment multiplier reaches about 2.1 after five years, with most effects occurring within two to three years. The multiplier is significantly higher in recessions and in economies with low public debt or a relatively low stock of public capital.