Public capital and productive economy profits: evidence from OECD economies

This paper examines the effects of public capital and government final consumption expenditure on the rate of profit in the productive sectors of the OECD economies over the period of 1977-2006. Public capital (expressed as a proportion of private capital) is considered in a multivariate setting, alongside other determinants of profit. The panel cointegration and panel vector autoregressive (PVAR) models are used to remedy the shortcomings of the time series analyses in the short samples and the stationary data panel models. The study demonstrates the absence of cointegration between the variables, but the positive and significant effects of public capital that are particularly manifest in the short-run, as well as the negative and insignificant impact of overall government consumption expenditure. The paper highlights the importance of public capital for macroeconomic outcomes, the relevance of the real channels of fiscal policy, and the non-neutrality of the type of government expenditure for economic outcomes.