Impact of Government Expenditure on Private Investment

5583 Words23 Pages
Empirical Economics (2005) 30:493–504 DOI 10.1007/s00181-005-0245-9 Effects of government expenditure on private investment: Canadian empirical evidence Baotai Wang Economics Program, University of Northern British Columbia, Prince George, British Columbia, Canada V2N 4Z9 First version Received: May 2002/Final version received:20 May 2004 Abstract. The purpose of this study is to investigate the relationship between government expenditures and private investment in Canada during the period 1961 to 2000. To this end, effects of five categories of government expenditures on investment are examined within the cointegration and error-correction framework. The empirical results show that government expenditure on education and health has positive effects whereas government expenditures on capital and infrastructure have negative effects on private investment. The other expenditure categories, including government expenditure on protection of persons and property, expenditure on debt charges, and expenditure on government and social services have no significant effects on private investment. Key words: Fiscal policy, crowding-out effect, unit root test, cointegration, error-correction model JEL classification: C22, E62 1. Introduction The effect of government expenditure on private investment has long been an important issue in fiscal policy debates. Although many studies have provided valuable insights into this issue, it still remains highly controversial. Arguments along the Keynesian lines (i.e., the general IS-LM framework) focus mainly on the ways that the government chooses to finance its spending. I wish to thank Baldev Raj for his valuable comments on this study which have led to an important improvement in the paper. I would also like to thank my colleagues Tomson Ogwang, Paul Bowles, Jalil Safaei, and an anonymous referee for their comments. However, the usual disclaimer

More about Impact of Government Expenditure on Private Investment

Open Document