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

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The impact of public capital on output has declined over time. 78 Volume13 N°1 2008 EIB PAPERS and the last refers to 1982-2001. In line with our findings for the full sample, in all these VARs the number of lags is set to two and two cointegrating vectors are imposed. Figure 7 suggests that the impact of public capital on output has declined over time. Figure 6. Panel VECM: Impulse response of output to a shock to public capital 2.4 2.0 1.6 1.2 0.8 0.4 0 Note: The figure shows the impulse response of output to a one-standard-deviation shock to public capital. The horizontal axis shows the number of years after the shock. Figure 7. Rolling panel VAR: Long-run impact on output of a shock to public capital 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0 0 10 20 30 40 50 60 70 80 90 100 1960-1979 1961-1980 1962-1981 1963-1982 1964-1983 1965-1984 1966-1985 1967-1986 1968-1987 1969-1988 1970-1989 Note: The figure shows (for every 20-year rolling window) the estimated long run (semi) elasticity of output with respect to public capital calculated as the response after 20 periods divided by a one standard-deviation shock in public capital. 1971-1990 1972-1991 1973-1992 1974-1993 1975-1994 1976-1995 1977-1996 1978-1997 1979-1998 1980-1999 1981-2000 1982-2001
Overall, the findings of the recursive VARs and rolling-window panel VARs may be interpreted as support for the ‘saturation hypothesis’, according to which countries with declining marginal productivity of public capital decided to reduce public investment spending. As we have shown in Figure 1, most OECD countries saw their government capital stock in relation to GDP drop during the period under consideration. This may have been a rational decision in view of the declining long-run impact of government capital shown in Figure 7. Indeed, except for Iceland where the public capital stock slightly increased, all countries for which our recursive VARs suggest a decline in the long-run impact on income of a shock to public capital (see Table 5) reduced their public capital stock relative to GDP. However, some caution is needed here as there are alternative explanations for the relative decline in public capital. For example, there is evidence that in times of large fiscal contractions, government capital spending is reduced more than other categories of government spending (see, for instance, De Haan et al. 1996). 5. Conclusions In this paper we have addressed two questions. First, to what extent does the impact of public capital differ across countries? Second, to what extent does it differ over time? In addressing these issues, we have employed Vector Auto Regression (VAR) models as they may best capture the dynamic interactions between variables. We have applied two approaches. In the first we estimate VAR models for individual countries. We closely follow Kamps (2004) but use a better proxy for labour input (total hours worked), which leads to different results. The estimated long-run impact of public capital on output varies across countries and is negatively correlated with both the ratio of public capital to private capital and the variability of public capital over time. Using recursive VARs, we find that in the majority of countries the effect of a public-capital shock on output decreased during the 1990s. Countries where the impact of public capital on output increased had an increasing capital-to-GDP ratio and vice versa. The second approach, a panel VAR model, has been motivated by the relatively short time span covered by the data for individual countries. Applying a ‘rolling’ time window, the results confirm that the long-run impact of public capital on output has clearly declined over time. Declining public-capitalto-GDP ratios may have reflected the declining long-run productivity of public capital. EIB PAPERS Volume13 N°1 2008 79
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Preface This year the European Inve
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Infrastructure investment, growth a
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Government investment is not the sa
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Different types of government inves
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Despite progress, infrastructure de
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Table 7. Infrastructure indicators
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EU funds provide additional resourc
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Various empirical studies confirm t
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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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Fiscal adjustment and reforms need
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