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On the Interaction between Public Investment and Private Capital in Economic Growth

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  • Alberto Bucci
  • Chiara Del Bo

Abstract

This paper examines two possible sources of interaction between private capital and productive public expenditure within an endogenous growth model. On the one hand, public investment and private capital are complementary with each other in the production of goods. On the other, they can be either complementary or substitutes in the production of new productive public capital. In our model private capital and the stock of productive public spending are two reproducible productive inputs interacting with each other in goods production and in productive public capital investment. The share of productive public expenditure devoted to output production can be exogenous or endogenous, and we consider a Cobb-Douglas as well as a more general CES aggregate production function. Our main results suggest that, when the share productive public expenditure devoted to output production is exogenous along the balanced growth path equilibrium the common growth rate is a negative function of this share and a positive function of the degree of complementarity between the two forms of capital. When the sectoral allocation of productive public expenditure is endogenous, the main determinant of the economy’s long run growth rate is, along with the model’s preferences parameters, the public capital’s share in GDP. Unlike existing literature (notably, Barro 1990), we find that the relationship linking the economy’s growth rate and the productive public expenditure’s share in GDP is U-shaped, rather than monotonically decreasing.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c015_007.

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Length: 38 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:deg:conpap:c015_007

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Keywords: Economic Growth; Complementarity; Productive Public Investment; Private Capital;

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References

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  1. Growiec Jakub, 2006. "Fertility Choice and Semi-Endogenous Growth: Where Becker Meets Jones," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(2), pages 1-25, September.
  2. Miguel D. Ramirez & Nader Nazmi, 2003. "Public Investment and Economic Growth in Latin America: an Empirical Test," Review of Development Economics, Wiley Blackwell, vol. 7(1), pages 115-126, February.
  3. Andreas Irmen & Johanna Kuehnel, 2008. "Productive Government Expenditure and Economic Growth," CESifo Working Paper Series 2314, CESifo Group Munich.
  4. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
  5. Bentollia, S. & Saint-Paul, G., 1999. "Explaining Movements in the Labor Share," Papers 9905, Centro de Estudios Monetarios Y Financieros-.
  6. Chiara DEL BO & Massimo FLORIO, 2008. "Infrastructure and growth in the European Union: an empirical analysis at the regional level in a spatial framework," Departmental Working Papers 2008-37, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  7. Kaz Miyagiwa & Chris Papageorgiou, 2003. "Elasticity of substitution and growth: normalized CES in the Diamond model," Economic Theory, Springer, vol. 21(1), pages 155-165, 01.
  8. Erdal Atukeren, 2005. "Interactions Between Public and Private Investment: Evidence from Developing Countries," Kyklos, Wiley Blackwell, vol. 58(3), pages 307-330, 07.
  9. David E. Bloom & David Canning & Jaypee Sevilla, 2001. "The Effect of Health on Economic Growth: Theory and Evidence," NBER Working Papers 8587, National Bureau of Economic Research, Inc.
  10. Aiyar, Shekhar & Dalgaard, Carl-Johan, 2009. "Accounting for productivity: Is it OK to assume that the world is Cobb-Douglas?," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 290-303, June.
  11. John Creedy & Ross Guest, 2008. "Discounting and the Time Preference Rate," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 109-127, 03.
  12. Miguel Ramirez, 2000. "The impact of public investment on private investment spending in Latin America: 1980–95," Atlantic Economic Journal, International Atlantic Economic Society, vol. 28(2), pages 210-225, June.
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