Abstract
A recent development in macroeconomic theory suggests that public investmentper se is relevant to economic growth, without regard to the means of financing government activity. This study undertakes an empirical investigation of this proposition, comparing two subperiods of the manufacturing sector's performance in Greece. Our test results support the conventional view that the size of public capital formation and the real intertemporal allocation of public sector may be important for determining manufacturing costs and profits but public deficits are likely to be of comparable or even dominating importance in determining manufacturing output. The emphasis on the financial as opposed to the real aspects of the government's decisions allows the establishment of a benchmark model as an appealing alternative to the newclassical analysis.
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