Private capital formation and government spending interaction in the case of eurozone countries

Abstract

The purpose of this research study is to investigate, with the use of panel cointegration methodology, the existence of a stationary long-run relationship between private capital formation and total government spending in Eurozone countries since the introduction of the euro as currency. Our findings indicate a positive but not complete (one to one) long run relationship on average. This positive relationship is smaller for the PIGS countries relevant to other Eurozone members and it is significantly reduced over time, implying economic asymmetries among Euro Area countries. An interesting finding of the performed analysis is that Greece, one of the panel countries, presents the fastest long-run adjustment process but its existence significantly reduces the magnitude of the overall average long-run coefficient. Therefore, the implementation of common European policies across all countries is expected to be a difficult task for the policy makers.