Infrastructure, conventions and private investment: An empirical investigation

Abstract

This study aims to test the hypotheses that a country's infrastructure deterioration leads to a fall in private investment as well as to a reduction in the private investment elasticities in relation to its determinants such as the real interest rate, real exchange rate, public investment, domestic credit and the infrastructure stock itself. These hypotheses, which are elaborated from the Post Keynesian view, are tested for the period 1985–2013, for 87 countries and two subgroups of low and high per capita income countries, using the estimators dynamic fixed effects, pooled mean group, and cross-sectionally augmented pooled mean group in a heterogeneous dynamic panel. The results highlight the positive impact of infrastructure on private capital formation. They also suggest that the physical deterioration of the infrastructure stock promotes declines in private investment elasticities, mitigating the private investment sensitivity to positive shocks as well as the effectiveness of economic policy in stimulating private investment through changes in its determinants.