Public Investment and Private Sector Performance – International Evidence

Abstract

This paper analyzes the effects of public investment on aggregate private sector performance for a group of twelve OECD economies. the empirical results are based on impulse response function analysis associated with country-specific VAR/ECM models. Estimation results suggest that for most countries, public investment crowds in private investment while it does not substantially affect employment. More importantly, the effects of public investment on private output are positive for all the countries. Germany, Japan, Sweden, UK, and US are the countries with the highest long-term elasticities of output with respect to public investment. Therefore, there seems to be a strong correlation across countries between the elasticity of output with respect to public investment and the levels of economic achievement. Finally, empirical results suggest that public investment affects labor productivity growth positively for all countries. Accordingly, the decline in public investment is a legitimate candidate to explain the slowdown of labor productivity growth in these countries.