EIB Papers Volume 13. n°1/2008 - European Investment Bank

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56 Volume13 N°1 2008 EIB PAPERS ABSTRACT This paper presents new estimates for 21 OECD countries covering the period 1960-2001, focusing on two questions: To what extent does the impact of public capital on output differ across countries? And to what extent does it differ over time? Using vector autoregressions (VARs), we find that in some countries a shock to public capital has a positive long-run impact on GDP while in others the longrun impact is zero or even negative. We also find that variability of public capital and its long-run impact on output are negatively correlated. Furthermore, when the public capital stock is large relative to the private capital stock the long-run impact of public capital is lower. Our results on ‘recursive’ VARs suggest that in the majority of countries the effect of a public-capital shock on output has decreased over time. Countries where the impact of public capital decreased during the 1990s have a declining public-capital-to-GDP ratio, and vice versa. Estimates based on a panel VAR for the OECD area confirm the declining long-run impact of public capital. Richard Jong-A-Pin (r.m.jong.a.pin@rug.nl) is a PhD student at the University of Groningen, the Netherlands. Jakob de Haan (jakob. de.haan@rug.nl) is professor of Political Economy at the University of Groningen and fellow of CESifo (Munich, Germany). He is also director of the Graduate School and Research Institute SOM of the University of Groningen.
Time-varying impact of public capital on output: New evidence based on VARs for OECD countries 1. Introduction It is hard to imagine a well-functioning economy without public capital. While public capital is necessary for modern economies to function, it may not be the case that more public capital causes more growth at all stages of development. Indeed, in their survey Romp and De Haan (2005) report that even though the findings of recent studies on the impact of public capital on output are less dispersed than those of older studies, there is still quite some variety in the findings, particularly as to the magnitude of the effect. In other words, the literature supports the notion that public capital matters but it cannot serve to unequivocally argue in favour of more or less public investment (Estache and Fay 2007). The variety of findings is, in fact, unsurprising. There is no reason to expect the effect of public capital to be constant (or even systematically positive) over time or across countries. Furthermore, estimating the impact of public capital on output is a complicated endeavour, and papers vary in how carefully they deal with pitfalls, like endogeneity and lack of sufficiently long time series of high-quality data (Estache and Fay 2007). Various authors have tried to determine the productivity effects of public capital by estimating a Cobb-Douglas production function that includes public capital as an input. Aschauer (1989) was one of the first to use this approach for the United States in an attempt to explain the productivity slowdown of the 1970s. He found that a one-percent increase in the public capital stock increases private capital productivity by 0.39 percent, suggesting that public capital is an important determinant of production. Since then, many authors have employed this approach (see Romp and De Haan 2005). However, while public capital may affect productivity and output, economic growth can also shape the demand and supply of public capital services, which is likely to cause an upward bias in the estimated returns to public capital. To deal with the interaction between output, public capital, and private capital, Vector Auto Regression (VAR) models have been proposed. The VAR approach sidesteps the need to specify a structural model by modelling every endogenous variable as a function of its own lagged values and the lagged values of the other variables in the system. VAR models have a number of advantages over structural approaches such as the production function approach (Kamps 2004). First, VAR models do not impose any causal links between the variables a priori but allow testing whether the causal relationship implied by the production function approach is valid or whether there are feedback effects from output to inputs. Second, the VAR approach allows for indirect links between the variables in the model. In the VAR approach, the long-run output effect of a change in public capital results from the interaction of all the variables in the model. For example, public capital may not only directly affect output but may also have an indirect impact on output via its effects on the private factors of production. Third, the VAR approach does not assume that there is at most one long-run relationship among the variables in the model. This paper first offers a survey of recent research on the impact of public capital on output in which VAR models are used. After identifying the major steps that have to be taken in deciding on the specification of a VAR, we come up with new estimates for 21 OECD countries covering the period 1960-2001. We focus on two important questions. First, to what extent does the impact of public capital differ across countries? Second, to what extent does it differ over time? Richard Jong-A-Pin Jakob de Haan EIB PAPERS Volume13 N°1 2008 57
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High GDP growth in the new member s
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EU funds provide additional resourc
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In some new member states there is
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PPPs offer new opportunities to fin
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Strong legal and institutional fram
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Additional fiscal reporting - even
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