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On the Substitution of Private and Public Capital in Production

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  • Zidong An
  • Alvar Kangur
  • Chris Papageorgiou

Abstract

Most macroeconomic models assume that aggregate output is generated by a specification for the production function with total physical capital as a key input. Implicitly this assumes that private and public capital stocks are perfect substitutes. In this paper we test this assumption by estimating a nested-CES production function whereas the two types of capital are considered separately along with labor as inputs. The estimation is based on our newly developed dataset on public and private capital stocks for 151 countries over a period of 1960-2014 consistent with Penn World Table version 9. We find evidence against perfect substitutability between public and private capital, especially for emerging and LIDCs, with the point estimate of the elasticity of substitution estimated closely around 3.

Suggested Citation

  • Zidong An & Alvar Kangur & Chris Papageorgiou, 2019. "On the Substitution of Private and Public Capital in Production," IMF Working Papers 19/232, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:19/232
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    More about this item

    Keywords

    Economic growth; Economic systems; Economic models; Financial crises; Economic functions; public capital; private capital; elasticity of substitution; production function; WP; economic Outlook; economy-wide; depreciation rate;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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