Crowding out or crowding in? Correlations of spending components within and across countries

Abstract

Using data for a sample of advanced and developing countries, the paper studies variation in the transmission of shocks from public and private components of spending to the macro-economy and distinguishes between the effects of expansionary and contractionary shocks. The aim is to study the extent by which capacity and propagation channels would reinforce or mitigate the cyclical responses of macroeconomic variables to expansionary and contractionary shocks to private and public components of spending. Further, the evidence will spell out the extent of co-movement in the variables’ adjustments to the specific shock across the macro economy. The bulk of the time-series evidence indicates more pervasive effects on growth in connection to private consumption across advanced countries. In contrast, the growth effects of public consumption are more pervasive across developing countries. Across the two groups, the growth impact of public consumption is more pronounced, compared to that of public investment. Further, the inflationary effects are pronounced with respect to public and private spending shocks. In general, the limited statistically significant real time-series evidence attests to conflicting channels with respect to variables’ adjustments to one shock and inadequate co-movement in the transmission mechanism of various public and private spending shocks in many countries.