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

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.

Appendices

Appendix 1 –The analytics of the macro rates of return

We compute the long-run accumulated elasticity of Y with respect to public investment, Ipub, from the accumulated impulse response functions (IRF) of the VAR, as

$$ {\varepsilon}_{Ipub}=\frac{\Delta \log Y}{\Delta \log Ipub}. $$

(2)

The long-term marginal productivity of public investment is given by

$$ MPIpub\equiv \frac{\Delta Y}{\Delta Ipub}={\varepsilon}_{Ipub}\frac{Y}{Ipub}. $$

(3)

The partial-cost dynamic feedback rate of return of public investment, r₁, is the solution for:

$$ {\left(1+{r}_1\right)}^{20}= MPIpub. $$

(4)

The long-term accumulated elasticity of Y with respect to Ipriv can also be derived from accumulated IRF in a similar way:

$$ {\varepsilon}_{Ipriv}=\frac{\Delta \log Y}{\Delta \log Ipriv}, $$

(5)

and the long-term marginal productivity of private investment is given by

$$ MPIpriv\equiv \frac{\Delta Y}{\Delta Ipriv}={\varepsilon}_{Ipriv}\frac{Y}{Ipriv}. $$

(6)

Therefore, the marginal productivity of total investment, MPTI, is as follows:

$$ MPTI=\frac{\Delta Y}{\Delta Ipub+\Delta Ipriv}=\frac{1}{MPIpub^{-1}+{MPIpriv}^{-1}} $$

(7)

And the rate of return of total investment, from an impulse to public investment, r₂, is the solution for:

$$ {\left(1+{r}_2\right)}^{20}= MPTI. $$

(8)

Appendix 2

Table 5 Data sources