Testing of the crowding out effect for Turkey

Mücahit Aydın,Veli Yılancı

doi:10.18844/gjhss.v2i2.447

Abstract

In this study, we test the effect of public investment on private sector investment for Turkey for the period 1980-2014. There can be three different types of relationship between them. Public investment can have crowding in effect on private sector investment. That is, an increase in public investments creates same way change in private sector investments. Public investment can have crowding out effect on private sector investment. In other words, an increase in public investments decreases private sector investments Public investment can have no effect on private sector investment. We first test the existence of the relationship between them by using recently introduced unit root and cointegration tests. We test the stationarity of the variables by using Kapetanios (2005) unit root test and test the long run relationship by employing Maki (2009) cointegration test. Both of the tests allow multiple structural breaks which determined endogenously. Since we find the long run relationship between public and private sector investments we examine the type of the effect using FMOLS cointegrating model which supports evidence for the crowding-in effect. Keywords: Crowding Out Effect, Cointegration, Structural Breaks

Highlights

IntroductionOne of the most important issues in economics literature has been analyzing the effect of public sector investment expenditures on private sector investment expenditures
One of the most important issues in economics literature has been analyzing the effect of public sector investment expenditures on private sector investment expenditures.Private investment expenditures has an important role in the economic growth policy of developing countries
In this study we employ the yearly data of public investments and private investments from 1980 to 2014 which obtained from Undersecretariat of Treasury of Republic of Turkey Prime Ministry

Summary

Introduction

One of the most important issues in economics literature has been analyzing the effect of public sector investment expenditures on private sector investment expenditures. The stimulating public investments create a rise in interest rates which creates a decreasing effect on private investments (Çil Yavuz, 2001) This effect known as the crowding out effect. Basar and Temurlenk (2007) analyzed the crowding-in and crowding-out effects for Turkey in the 1980-2005 period using SVAR method They conclude that after the 1980-period, public investments crowding-outs private investments. After using Zivot-Andrews unit root test, he divide the analysis period in the two sub-periods He conclude that in the 1950-1975 period there exists crowding-in effect long run, and in the second sub-period there exists no cointegration relationship. In this study we test the long run relationship between the private sector investments and public sector investments by using unit root tests and cointegration tests which allows to determine the location of structural breaks and the number of breaks endogenously.

Econometric Methodology

Data and Empirical Results

Conclusion