The analysis attempts to identify components of federal government expenditures that are substitutes and complements to private investments. It also investigates the financing issue of public expenditures, whether the spending increase should be financed by taxes or by debts. Our results suggest a robust and negative relationship between government current expenditures and private investments. Meanwhile, development expenditures are positively related to private investments. Moreover, when we disaggregate public expenditures into their various components, we document only a strong negative relationship between the expenditures on transfer payments, public debt charges and pensions and the private investment rate. Lastly, we uncover evidence that debt-financed expenditures are superior to tax-financed expenditures.
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Find related papers by JEL classification: E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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