Crowding - in Effect of Public Investment on Private Investment

Toshiya Hatano

Public Policy Review, 2010, vol. 6, issue 1, 105-120

Abstract: This study investigates the effects of public investment on private investment based on Japanese empirical data. Since public capital is accumulated in tandem with the accumulation of private capital in the long-run from a historical perspective, it is quite natural that there is a positive relationship between private investment and public investment. However, some previous studies have provided evidence for the crowding-in effect of public investment on private investment while other studies have provided evidence for the crowding-out effect. What is the reason for these inconsistent results on the crowding-in effect? In order to answer this question, we will consider the possibility of analyzing the long-run relationship between private and public investment on the stock phase rather than the flow phase. Our empirical results show that there is a cointegration relationship between private capital and public capital. Accordingly, the relationship between private and public investment should be represented by an error correction mechanism designed to achieve a long-run stock equilibrium. Estimating the error correction model, we affirm the crowding-in effect of public investment on private investment.

Date: 2010
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Citations: View citations in EconPapers (17)

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