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Crowding-in and crowding-out effects of public investments in the Portuguese economy

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  • João Sousa Andrade
  • António Portugal Duarte

Abstract

This study analyses the effects of public and private investment on Portuguese GDP in the period 1960--2013. After a review of the literature based on works developed in the context of VAR analyses, an alternative econometric strategy is proposed. We opt for ADL models using the methodology of Krolzig-Hendry-Doornik. We estimate direct effects of public and private investments on themselves and also a system of simultaneous equations and calculate the multipliers of the exogenous variables, represented by the current external transfers, the short-run nominal interest rate and public debt ratio. Additionally, we tested a model with the first three equations of the system, using beyond those variables the real exchange rate as an exogenous variable. The results point to the existence of a complementarity between private investment and public investment rather than any idea of substitutability. We find that public debt has important negative effects on public and private investments and consequently on output. Public investment has positive effects on output and on private investment. The appreciation of the real exchange rate has an important and long-lasting negative effect upon output, confirming the presence of a mechanism associated with a Dutch-disease phenomenon in the Portuguese economy.

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  • João Sousa Andrade & António Portugal Duarte, 2016. "Crowding-in and crowding-out effects of public investments in the Portuguese economy," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(4), pages 488-506, July.
    • Handle: RePEc:taf:irapec:v:30:y:2016:i:4:p:488-506
    DOI: 10.1080/02692171.2015.1122746
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space 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

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