Advertisement

Economic growth, public, and private investment returns in 17 OECD economies

  • António Afonso
  • Miguel St. Aubyn
Original Article

Abstract

We study the macroeconomic effects of public and private investment in 17 OECD economies through a VAR analysis with annual data from 1960 to 2014. From impulse response functions we find that public investment had a positive growth effect in most countries, and a contractionary effect in Finland, UK, Sweden, Japan, and Canada. Public investment led to private investment crowding o ut in Belgium, Ireland, Finland, Canada, Sweden, the UK and crowding-in effects in the rest of the countries. Private investment has a positive growth effect in all countries; crowds-out (crowds-in) public investment in Belgium and Sweden (in the rest of the countries). The partial rates of return of public and private investment are mostly positive. Our results are robust to the ordering of private and public investment in the VAR.

Keywords

Fiscal policy Public investment Private investment Crowding-in Macroeconomic rates of return Impulse response functions VAR 

JEL Classification

C32 E22 E62 

Notes

Acknowledgments

We thank an anonymous referee, the editor, and Narcissa Balta and participants at the DG ECFIN Workshop on “Fiscal policy after the crisis”, January 2016, Brussels, at the Portuguese Economic Journal Conference, July 2016, Coimbra, and at the 19th Infer Annual Conference, Bordeaux, June 2017, for useful comments and suggestions. The opinions expressed herein are those of the authors and do not necessarily reflect those of their employers.

UECE is supported by FCT (Fundação para a Ciência e a Tecnologia, Portugal).

References

  1. Abiad A, Furceri D, Topalova P (2015) The macroeconomic effects of public investment: evidence from advanced economies. IMF WP/15/95Google Scholar
  2. Afonso A, Jalles J (2015) How does fiscal policy affect investment? Evidence from a large panel. Int J Financ Econ 20(4):310–327CrossRefGoogle Scholar
  3. Afonso A, St. Aubyn M (2009) Macroeconomic rates of return of public and private investment: crowding-in and crowding-out effects. Manch Sch 77(S1):21–39CrossRefGoogle Scholar
  4. Afonso A, St. Aubyn M (2010) Public and private investment rates of return: evidence for industrialised Countries. Appl Econ Lett 17(9):839–843CrossRefGoogle Scholar
  5. Brückner M, Tuladhar A (2014) Local government spending multipliers and financial distress: evidence from Japanese prefectures. Econ J 124(581):1279–1316CrossRefGoogle Scholar
  6. Cavalcanti C, Merrero G, Le T (2014) Measuring the impact of debt-financed public investment. World Bank, Policy Research Working Paper No. 6766Google Scholar
  7. Creel J, Hubert P, Saraceno F (2015) An empirical analysis of the link between public and private investment in four OECD countries. 17th Banca d’Italia Workshop on Public Finance “Beyond the Austerity Dispute: New Priorities for Fiscal Policy”, Perugia, S.A.DI.BA., 9–11 April 2015Google Scholar
  8. Dreger C, Reimers H (2016) On the relationship between public and private investment in the euro area. Econ Model 58:154–158CrossRefGoogle Scholar
  9. EC (2015) Making the best use of the flexibility within the existing rules of the Stability and Growth Pact. COM(2015) 12 final, Strasbourg, 13.1.2015, COM(2015) 12 finalGoogle Scholar
  10. Funashima Y, Gakuin T (2017) Spatial crowding-out and crowding-in effects of government spending on the private sector in Japan. Faculty of Economics, University, TGU-ECON Discussion Paper Series #2017-3Google Scholar
  11. IMF (2014) Is it time for an infrastructure push? The macroeconomic effects of public investment. IMF World Economic Outlook, OctoberGoogle Scholar
  12. Le Moigne M, Saraceno F, Villemot S (2016) Probably too little, certainly too late. An assessment of the Juncker investment plan. OFCE WP 2016–10Google Scholar
  13. Mahmoudzadeh M, Sadeghi S, Sadeghi S (2013) Fiscal spending and crowding out effect: a comparison between developed and developing countries. Inst Econ 5(1):31–40Google Scholar
  14. Pereira A (2000) Is all public capital created equal? Rev Econ Stat 82(3):513–518CrossRefGoogle Scholar
  15. Pereira A, Pinho F (2008) Public investment and budgetary consolidation in Portugal. Port Econ J 7(3):183–2013CrossRefGoogle Scholar
  16. Pereira A, Pinho M (2011) Public investment, economic performance and budgetary consolidation: VAR evidence for the first 12 Euro countries. J Econ Dev 36(1):1–20Google Scholar
  17. Pina A, St. Aubyn M (2005) Comparing macroeconomic returns on human and public capital: an empirical analysis of the Portuguese case (1960–2001). J Policy Model 27:585–598CrossRefGoogle Scholar
  18. Pina A, St. Aubyn M (2006) How should we measure the return on public investment in a VAR? Econ Bull 8(5):1–4Google Scholar
  19. TEU (2012) Consolidate version of the Treaty on the functioning of the European Union. Off J Eur Union 26.10.2012Google Scholar
  20. Turrini A (2004) Public investment and the EU fiscal framework. European economy. European commission economic papers, n°202, MayGoogle Scholar
  21. Xu X, Yan Y (2014) Does government investment crowd out private investment in China? J Econ Policy Reform 17(1):1–12CrossRefGoogle Scholar

Copyright information

© ISEG 2018

Authors and Affiliations

  1. 1.REM – Research in Economics and Mathematics, UECE – Research Unit on Complexity and EconomicsISEG-UL – Universidade de LisboaLisbonPortugal

Personalised recommendations