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Crowding - in Effect of Public Investment on Private Investment

  • Toshiya Hatano

    (Professor, Meiji University)

This study investigates the effects of public investment on private investment based on Japanese empirical data. Since public capital is accumulated in tandem with the accumulation of private capital in the long-run from a historical perspective, it is quite natural that there is a positive relationship between private investment and public investment. However, some previous studies have provided evidence for the crowding-in effect of public investment on private investment while other studies have provided evidence for the crowding-out effect. What is the reason for these inconsistent results on the crowding-in effect? In order to answer this question, we will consider the possibility of analyzing the long-run relationship between private and public investment on the stock phase rather than the flow phase. Our empirical results show that there is a cointegration relationship between private capital and public capital. Accordingly, the relationship between private and public investment should be represented by an error correction mechanism designed to achieve a long-run stock equilibrium. Estimating the error correction model, we affirm the crowding-in effect of public investment on private investment.

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File URL: http://www.mof.go.jp/english/pri/publication/pp_review/ppr007/ppr007e.pdf
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Article provided by Policy Research Institute, Ministry of Finance Japan in its journal Public Policy Review.

Volume (Year): 6 (2010)
Issue (Month): 1 (February)
Pages: 105-120

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Handle: RePEc:mof:journl:ppr007e
Contact details of provider: Web page: http://www.mof.go.jp/pri/
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  1. Voss, Graham M., 2002. "Public and private investment in the United States and Canada," Economic Modelling, Elsevier, vol. 19(4), pages 641-664, August.
  2. David Aschauer, 1988. "Does public capital crowd out private capital?," Staff Memoranda 88-10, Federal Reserve Bank of Chicago.
  3. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  4. Erenburg, S. J. & Wohar, Mark E., 1995. "Public and private investment: Are there causal linkages?," Journal of Macroeconomics, Elsevier, vol. 17(1), pages 1-30.
  5. Sarantis Kalyvitis, 2003. "Public Investment Rules and Endogenous Growth with Empirical Evidence from Canada," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(1), pages 90-110, February.
  6. Alfredo M. Pereira, 2001. "On the Effects of Public Investment on Private Investment: What Crowds in What?," Public Finance Review, , vol. 29(1), pages 3-25, January.
  7. Otto, Glenn & Voss, Graham, 1996. "Public Capital and Private Production in Australia," MPRA Paper 52110, University Library of Munich, Germany.
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