PUBLIC INVESTMENT, ECONOMIC PERFORMANCE AND BUDGETARY CONSOLIDATION: VAR EVIDENCE FOR THE FIRST 12 EURO COUNTRIES

다국어 초록 (Multilingual Abstract)

In a period of heightened concern about fiscal consolidation in the euro area, a politically expedient way of controlling the public budget is to cut public investment. A critical question, however, is whether or not political expediency comes at a cost, in terms of both long-term economic performance and future budgetary contention efforts. First, common wisdom suggests that public investments have positive effects on economic performance although the empirical evidence is less clear. Second, it is conceivable that public investment has such strong effects on output that over time it generates enough additional tax revenues to pay for itself. Obviously, it is equally plausible that the effects on output although positive are not strong enough for the public investment to pay for itself. In this paper, we investigate these issues empirically for the first twelve countries in the euro area using a vector auto-regressive approach. We conclude that the euro countries can be gathered in four groups according to the nature of the economic and budgetary impact of public investment. The first group includes Austria, Belgium, Luxembourg, and Netherlands, where the economic effects are either negative or positive but very small and, therefore, cuts will be harmless for the economy and effective from a budgetary perspective. The second group includes Finland, Portugal, and Spain, where public investment does not pay for itself and, therefore, cuts are an effective tool of budgetary consolidation although they are harmful for the economy. The third group includes France, Greece, and Ireland where public investment just pays for itself and therefore cuts are not an effective way of achieving long-term budgetary consolidation and are harmful for the economy. Finally, the fourth group includes Germany and Italy, where public investment more than pays for itself and, therefore, cuts are not only harmful for the economy but also counterproductive from a budgetary perspective.

참고문헌 (Reference)

1 Morris, R., "The Reform and Implementation of the Stability Growth Pact" 2006

2 Christiano, L.J., "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds" 78 (78): 16-34, 1996

3 Kamps, C., "The Dynamic Effects of Public Capital: VAR Evidence for 22 OECD Countries" 12 : 533-558, 2005

4 European Commission, "Statistical Annex of European Economy, 69, Economy Office for Official Publications of the EC"

5 Perotti, R., "Public Investment: Another (different) Look" 2004

6 International Monetary Fund, "Public Investment and Fiscal Policy" 2004

7 Pereira, A.M., "Public Capital Formation and Private Investment: What Crowds In What" 29 (29): 3-25, 2001

8 Gonzalo, J., "Pitfalls in Testing for Long-Run Relationships" 86 : 129-154, 1998

9 Pereira, A.M., "On the Impact of Public Investment on the Performance of US Industries" 31 (31): 66-90, 2003

10 Organization for Economic Cooperation and Development, "National Accounts"

11 Christiano, L.J., "Monetary Policy Shocks: What Have we Learned and to What End?, in Handbook of Macroeconomics, 1(Part A)" Elsevier 65-148, 1999

12 Pereira, A.M., "Is all Public Capital Created Equal" 82 (82): 513-518, 2000

13 Buti, M., "Fiscal Dicipline and Flexibility in EMU: The Impelmentation of the Stability and Growth Pact" 14 (14): 81-97, 1998

14 Perotti, R., "Estimating the Effects of Fiscal Policy in OECD Countries" CEPR D.P 4842-, 2005

15 Rudebusch, G.D., "Do Measures of Monetary Policy in a VAR Make Sense" 39 : 907-931, 1998

16 Gonzalo, J., "Dimensionality Effect in Cointegration Analysis, in Festschrift in Honour of Clive Granger" Oxford University Press 212-229, 1999

17 Poterba, J.M., "Capital Budgets, Borrowing Rules, and State Capital Spending" 52 : 165-187, 1995