Das Public Kapital: How Much Would Higher German Public Investment Help Germany and the Euro Area?

Abstract

Given the backdrop of pressing infrastructure needs, this paper argues that higher German public investment would not only stimulate domestic demand in the near term and reduce the current account surplus, but would also raise output over the longer-run as well as generate beneficial regional spillovers. While time-to-build delays can weaken the impact of the stimulus in the shortrun, the expansionary effects of higher public investment are substantially strengthened with an accommodative monetary policy stance-as is typical during periods of economic slack. The current low-interest rate environment presents a window of opportunity to finance higher public investment at historically favorable rates.

Spillover effects of Germany's final demand on Southern Europe

“…Our estimates complement existing ones derived from dynamic stochastic general equilibrium (DSGE) models (BMWi, 2015a;Bundesbank, 2016;Elekdag & Muir, 2014;IMF, 2015b;in't Veld, 2013in't Veld, , 2017. DSGE models are grounded in theory; they incorporate a wide range of behavioural details and emphasise forward-looking decision making by rational agents.…”

“…The GIMF model does not capture the differences across countries and cannot reveal that Greece is an outlier. Elekdag and Muir (2014) use the same six-region GIMF model to investigate the spillover effects of shocks to Germany's public investment. If monetary policy is accommodative, a 2-year debt-financed public investment shock, scaled to 1% of GDP per year, raises the EA5's GDP by 0.2% relative to the baseline scenario.…”

Measuring fiscal spillovers in EMU and beyond: A Global VAR approach

“…For instance, through the demand channel, a fiscal stimulus in one country may stimulate aggregate demand in other countries (Alcidi et al ., ; Bundesbank, , European Commission, , and Weyerstrass et al ., ; who speak of the ‘output channel’ in this context). This is in a nutshell what Elekdag and Muir () and Hebous and Zimmermann () refer to as ‘positive spillover effects through trade’. Under a regime of flexible exchange rates, a fiscal expansion increases domestic economic activity and also generates pressure on the exchange rate to appreciate and the domestic interest rate to increase.…”

“…Finally, the stance of monetary policy is also expected to influence spillover effects (Elekdag and Muir, ; Gadatsch et al ., ): Simulations depicted by In't Veld () generate evidence that debt‐financed increases in government investment in surplus countries have stronger positive GDP spillovers to other member states of the Euro area when monetary policy rates are held constant (e.g., when monetary policy is operating at the lower zero bound) (In't Veld, ). Bundesbank () and Cook and Devereux () assess the role of monetary policy for fiscal spillovers in the context of a currency union…”

“…This spillover within the Euro area gives support for the standard ‘beggar‐thy‐neighbor’ argument for policy coordination which makes possible the internalization of the negative spillover from fiscal policies through these channels. It is also important to realize that Euro area member countries are likely to differ in the spillover they experience from changes in the common short‐term interest rate and the euro exchange rate (Weyerstrass et al ., , Elekdag and Muir, ; Bundesbank, and In't Veld, ).…”