Is infrastructure capital productive? A dynamic heterogeneous approach

This paper offers an evaluation of the output contribution of infrastructure. Using a panel time series approach and a large cross‐country dataset, the paper estimates a long‐run aggregate production function relating gross domestic product to human capital, physical capital, and a synthetic measure of infrastructure comprising transport, power and telecommunications. Tests of the cointegration rank allowing it to vary across countries reveal a common rank with a single cointegrating vector, which we interpret as the long‐run production function. Estimation of its parameters is performed using the pooled mean group (PMG) estimator, which allows for unrestricted short‐run parameter heterogeneity across countries while imposing the (testable) restriction of long‐run parameter homogeneity. The long‐run elasticity of output with respect to the synthetic infrastructure index ranges between 0.07 and 0.10. The estimates are highly significant, both statistically and economically, and robust to alternative dynamic specifications and infrastructure measures. Tests of parameter homogeneity fail to yield evidence that the long‐run parameters differ across countries. Copyright © 2014 John Wiley & Sons, Ltd.