Public investment multipliers revisited: the role of production complementarities

Abstract

This paper revisits the issue of the public investment multiplier through the lens of complementarity or substitutability between private inputs and public infrastructure capital. Our main result is that public investment multipliers are much larger than in the literature when private inputs and public capital are good complements relative to the canonical Cobb–Douglas case where the degree of complementarity is unity, and, at the same time, public capital is in relative shortage, meaning that it acts as a ‘weak link’ in production. Within this framework, the stronger the degree of complementarity (respectively substitutability), the larger (respectively smaller) the size of the multiplier. The model is solved numerically by choosing its parameters according to UK data. The model's positive and normative implications are then compared to current values of policy variables in the UK economy.