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Can Government Demand Stimulate Private Investment?
Report

Can Government Demand Stimulate Private Investment?

Evidence from U.S. Federal Procurement

Shafik Hebous and Tom Zimmermann
IMF, 2016
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Editorial Rating

8

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Recommendation

Stimulus funds affect much more than just household consumption. Debates over whether government debt is appropriate when devoted to infrastructure investment often ignore the fact that the firms the state tasks to build new bridges and roads are also investing, increasing their own capacities and raising economic growth. This noteworthy study by economists Shafik Hebous and Tom Zimmermann explores how businesses expand by winning government contracts. getAbstract recommends it to policy makers, executives and investors.

Summary

While many researchers have looked at the effect of government spending on private consumption, few studies have focused on the impact of state spending on private investment. According to economic theory, companies – absent funding constraints – should invest until the marginal benefit of their investment equals their cost of capital. However, many firms’ imperfect access to capital limits their investing, thereby causing them to forgo potentially profitable activity. To understand the influence of government spending on the economy, it is critical to assess whether that spending helps companies overcome...

About the Authors

Shafik Hebous is an economist at the International Monetary Fund. Tom Zimmermann is an economist at the Federal Reserve Board.

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