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Public investment crowds in private investment - with ifs and buts

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  • Olegs Matvejevs

    (Latvijas Banka)

  • Olegs Tkacevs

    (Latvijas Banka)

Abstract

This study explores the relationship between public and private investment using a sample of 33 industrialized economies of the OECD. The methodology relies on the fact that the relation between stocks of public and private capital can affect private investment also in the short term. We demonstrate that the immediate effect of public investment on private investment is either small or statistically insignificant, whereas in the medium to long term, extra public investment crowds in private investment as the latter adjusts in order to bring the stock of private capital closer to its long-term cointegrating relationship with public capital. The estimated median public investment multiplier over a horizon of seven years is around 2, which means that each additional dollar of public investment attracts approximately two dollars of private investment. Additionally, we examine whether the crowding-in effect depends on a country’s institutional quality and the area of public spending. We show that it gets stronger with improvements in the quality of institutions related to the rule of law, government effectiveness and control of corruption. Public investment in economic affairs, education and health infrastructure is the most effective in attracting private investment.

Suggested Citation

  • Olegs Matvejevs & Olegs Tkacevs, 2022. "Public investment crowds in private investment - with ifs and buts," Working Papers 2022/04, Latvijas Banka.
    • Handle: RePEc:ltv:wpaper:202204
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    More about this item

    Keywords

    public investment; private investment; crowding in; crowding out; public investment multiplier; local projections; forecast errors; governance quality indicators;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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