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William Gbohoui
This paper investigates how macroeconomic uncertainty affects the fiscal multiplier of public investment. In theory, uncertainty can reduce the multiplier if the private sector becomes more cautious and does not respond to the fiscal stimulus. Conversely, it can increase the fiscal multiplier if public investment shocks improve private agents’ expectations about future economic outlook, and lead to larger private spending. Using the disagreement about GDP forecasts as a proxy for uncertainty, we find that unexpected increases in public investment have larger and longer-lasting effects on output, investment, and employment during periods of high uncertainty, with multipliers above 2, and the larger multipliers are not driven by economic slack. Public investment shocks are also found to boost private sector confidence during heightened uncertainty, driving-up expectations about future economic development which in turn magnify private sector response to the initial stimulus.
International Monetary Fund. Fiscal Affairs Dept.


Chapter 1 of the report draws some early lessons from governments’ fiscal responses to the pandemic and provides a roadmap for the recovery. Governments’ measures to cushion the blow from the pandemic total a staggering $12 trillion globally. These lifelines and the worldwide recession have pushed global public debt to an all-time high. But governments should not withdraw lifelines too rapidly. Government support should shift gradually from protecting old jobs to getting people back to work and helping viable but still-vulnerable firms safely reopen. The fiscal measures for the recovery are an opportunity to make the economy more inclusive and greener. Chapter 2 of this report argues that governments need to scale up public investment to ensure successful reopening, boost growth, and prepare economies for the future. Low interest rates make borrowing to invest desirable. Countries that cannot access finance will, however, need to do more with less. The chapter explains how investment can be scaled up while preserving quality. Increasing public investment by 1 percent of GDP in advanced and emerging economies could create 7 million jobs directly, and more than 20 million jobs indirectly. Investments in healthcare, housing, digitalization, and the environment would lay the foundations for a more resilient and inclusive economy.

Mr. Raphael A Espinoza, Juliana Gamboa-Arbelaez, and Mouhamadou Sy
This paper explores whether public investment crowds out or crowds in private investment. To this aim, we build a database of about half a million firms from 49 countries. We find that the effect of public investment on corporate investment depends both on leverage and financial constraints. Public investment boosts private investment for firms with low leverage. However, for firms with high leverage, private investment does not react to an increase in public investment, in line with theory (Myers 1977). We also find that the effect of public investment on corporate investment is much weaker for firms that are financially constrained.
International Monetary Fund. European Dept.
This Selected Issues paper analyzes productivity growth in Belgium. It highlights that Belgium’s subdued productivity growth can be explained by a combination of sectoral employment shifts, barriers to competition, the declining quality of infrastructure, and an aging workforce. The shift of employment toward lower productivity service sectors, common to many advanced economies, has been more pronounced in Belgium and explains half of the productivity gap with neighboring countries. Population aging is another secular factor that has contributed to the productivity slowdown. In addition, barriers to competition in some service sectors have lowered productivity growth and raised rents in these sectors.
International Monetary Fund. European Dept.
This Selected Issues paper studies diversification in Luxembourg’s economy and the role of the government. The economy of Luxembourg appears to be more concentrated than that of comparable countries. Sectoral output is more concentrated than in other countries; this relative lack of diversification is true even when the financial sector is excluded and even compared with other European countries with a small population. However, employment concentration is similar to that in other countries. Luxembourg specializes in sectors whose labor productivity is somewhat higher than in several benchmark countries. The government should continue to further diversify the economy by fostering an environment for growth.
International Monetary Fund. European Dept.
This Selected Issues paper identifies episodes of large and sustained current account surpluses in advanced economies (AEs) and compares Germany’s ongoing surplus with those episodes. In doing so, the paper aims to put Germany’s external position in a historical and cross-country context drawing from 55 years of data across 20 AEs. The comparison shows that the real growth of all domestic demand components, particularly of private investment, was remarkably weak during the latest sustained surplus episode in Germany in comparison with both “normal times” and other AE surplus episodes. Neither Germany’s nor a typical AE surplus episode has been accompanied by visible, broad-based competitiveness or terms of trade gains.
Mr. Selim A Elekdag and Mr. Dirk V Muir
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 short-run, 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.
International Monetary Fund. European Dept.
KEY ISSUES Context: ? Germany fundamentals are sound: balance sheets are generally healthy, unemployment is at a historic low, and the fiscal position is strong. ? While a recovery is underway, medium-term growth prospects are subdued and the current account surplus remains high. The economy also faces a still weak international environment, lingering uncertainty (including about future energy costs), and fast approaching adverse demographic changes. ? Germany could do more to increase its growth, thus strengthening its role as an engine of euro area recovery. Policy recommendations: ? Germany has the fiscal space to finance an increase in needed public investment, particularly in the transport infrastructure. Unlike public consumption, this would durably raise German output and have measurable growth spillovers on the rest of the euro area. ? Further reforms in services sector regulation would boost competition and productivity. ? Greater clarity about the future energy sector regulatory framework would encourage private investment in the energy infrastructure and beyond and strengthen the outlook. ? Decisions on the future level of the minimum wage should take into account the employment effects in certain regions. ? Banks should keep strengthening their capital position ahead of the completion of the ECB’s Comprehensive Assessment. ? The macroprudential framework needs to be ready as monetary conditions are set to remain accommodative for a prolonged period.
International Monetary Fund. European Dept.
This Selected Issues paper on Germany focuses on current economic condition in the country. The build-up of Germany’s current account surplus over the last decade does not lend itself to a single-factor explanation, as both global and domestic factors, as well as policy changes led to increased savings and lower investment. All sectors contributed to the build-up of the surplus. Although fiscal consolidation and higher household savings played a role, the corporate sector experienced a more pronounced shift. This paper provides a retrospective on these developments and explores whether the factors contributing to the surplus are likely to be reversed going forward. Although there are common global drivers for the non-financial corporations shift to a net lender position, several German-specific factors played a role, notably the labor market reforms in the 2000s, the business tax reforms, and the globalization of German firms’ production chains. The households’ saving–investment gap widened in the early 2000s as the pension reforms and growing income inequality boosted households’ savings and residential investment declined by the end of the reunification construction boom.