Abstract
Local public sector investment is determined in an environment of shifting economic conditions. Investments are investigated using an intertemporal decision model allowing for tests of forward looking behaviour and adjustments to expected and unexpected shocks. The econometric analysis of the aggregate local public sector over the period 1946–1990 indicates that local and county governments are forward looking and have small adjustment costs to investment. In a full investment demand model, only unexpected changes of gross domestic product and unemployment are shown to be important in the short run. The central government has arranged stable revenue growth of the local public sector, but greater volatility in macroeconomic conditions has led to fluctuations in local public investment.
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