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On the Relationship between Public and Private Investment in the Euro Area

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  • Dreger, Christian

    ()
    (DIW Berlin)

  • Reimers, Hans-Eggert

    ()
    (Wismar University of Technology, Business and Design)

Abstract

This paper explores the long run relationship between public and private investment in the euro area in terms of capital stocks and gross investment flows. Panel techniques ac-counting for international spillovers are employed. While private and public capital stocks are cointegrated, the evidence is quite fragile for public and private investment flows. They enter a long run relationship only after fundamental drivers of private investment, such as demand and financing costs are included. According to the impulse response analysis, private investment reacts to shocks in public investment both in terms of stock and flow variables. In contrast, public investment is rather exogenous. Therefore, the lack of public investment might have restricted private investment and GDP growth in the euro area. The results have strong implications for the future direction of fiscal austerity programs to combat the euro area debt crisis.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 8002.

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Length: 20 pages
Date of creation: Feb 2014
Date of revision:
Handle: RePEc:iza:izadps:dp8002

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Related research

Keywords: public and private investment; fiscal austerity; panel VAR;

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  1. Toshiya Hatano, 2010. "Crowding - in Effect of Public Investment on Private Investment," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, Policy Research Institute, Ministry of Finance Japan, vol. 6(1), pages 105-120, February.
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  13. Alan J. Auerbach & Yuriy Gorodnichenko, 2010. "Measuring the Output Responses to Fiscal Policy," NBER Working Papers 16311, National Bureau of Economic Research, Inc.
  14. Damiaan Persyn & Joakim Westerlund, 2008. "Error-correction–based cointegration tests for panel data," Stata Journal, StataCorp LP, StataCorp LP, vol. 8(2), pages 232-241, June.
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  16. Valila, Timo & Mehrotra, Aaron, 2005. "Evolution And Determinants Of Public Investment In Europe," Economic and Financial Reports, European Investment Bank, Economics Department 2005/1, European Investment Bank, Economics Department.
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