Public Investment, Economic Performance And Budgetary Consolidation: Var Evidence For The First 12 Euro Countries
In a period of heightened concern about fiscal consolidation in the euro area, a politically expedient way of controlling the public budget is to cut public investment. A critical question, however, is whether or not political expediency comes at a cost, in terms of both long-term economic performance and future budgetary contention efforts. First, common wisdom suggests that public investments have positive effects on economic performance although the empirical evidence is less clear. Second, it is conceivable that public investment has such strong effects on output that over time it generates enough additional tax revenues to pay for itself. Obviously, it is equally plausible that the effects on output although positive are not strong enough for the public investment to pay for itself. In this paper, we investigate these issues empirically for the first twelve countries in the euro area using a vector auto-regressive approach. We conclude that the euro countries can be gathered in four groups according to the nature of the economic and budgetary impact of public investment. The first group includes Austria, Belgium, Luxembourg, and Netherlands, where the economic effects are either negative or positive but very small and, therefore, cuts will be harmless for the economy and effective from a budgetary perspective. The second group includes Finland, Portugal, and Spain, where public investment does not pay for itself and, therefore, cuts are an effective tool of budgetary consolidation although they are harmful for the economy. The third group includes France, Greece, and Ireland where public investment just pays for itself and therefore cuts are not an effective way of achieving long-term budgetary consolidation and are harmful for the economy. Finally, the fourth group includes Germany and Italy, where public investment more than pays for itself and, therefore, cuts are not only harmful for the economy but also counterproductive from a budgetary perspective.
Volume (Year): 36 (2011)
Issue (Month): 1 (March)
|Contact details of provider:|| Web page: http://www.jed.or.kr/|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christophe Kamps, 2005.
"The Dynamic Effects of Public Capital: VAR Evidence for 22 OECD Countries,"
International Tax and Public Finance,
Springer;International Institute of Public Finance, vol. 12(4), pages 533-558, August.
- Kamps, Christophe, 2004. "The Dynamic Effects of Public Capital: VAR Evidence for 22 OECD Countries," Kiel Working Papers 1224, Kiel Institute for the World Economy (IfW).
- Buti, Marco & Franco, Daniele & Ongena, Hedwig, 1998. "Fiscal Discipline and Flexibility in EMU: The Implementation of the Stability and Growth Pact," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 81-97, Autumn.
- Gonzalo, Jesus & Lee, Tae-Hwy, 1998. "Pitfalls in testing for long run relationships," Journal of Econometrics, Elsevier, vol. 86(1), pages 129-154, June.
- Gonzalo, J. & Lee, T.H., 1995. "Pitfalls in Testing for Long Run Relationships," Papers 38, Boston University - Department of Economics.
- Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-931, November.
- Rudebusch, G.D., 1996. "Do Measures of Monetary Policy in a VAR Make Sense?," Papers 269, Banca Italia - Servizio di Studi.
- Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
- Alfredo M. Pereira, 2000. "Is All Public Capital Created Equal?," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 513-518, August. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:jed:journl:v:36:y:2011:i:1:p:1-20. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sung Y. Park)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.