Is public infrastructure spending productive in the Mexican case? A vector error correction analysis

Abstract

This paper addresses the important question of whether public investment spending on economic infrastructure enhances economic growth in Mexico. It estimates a Cobb-Douglas production function that includes public infrastructure capital. Using cointegration analysis, the paper estimates a vector error correction model (VECM) for the 1995 – 99 period. The results suggest that there is a long-term stable relationship among the variables included in the VECM. The evidence also indicates that both public infrastructure spending and private capital formation have a positive and highly significant effect on the rate of output growth. Finally, the impulse response functions (IRF) and the variance decompositions (VDC) of the endogenous variables in the VECM suggest that the response of private capital to public infrastructure is positive while the reverse causation is not affirmed. From a policy standpoint, the findings call into question stabilization policies that disproportionately reduce public infrastructure to meet targeted reductions in the fiscal deficit (JEL, O1, O47, O54).