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The Effects of Public Investment on Private Investment in Developing Economies

Lutfi Erden and Randall Holcombe
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Lutfi Erden: Hacettepe University

Public Finance Review, 2005, vol. 33, issue 5, 575-602

Abstract: The literature on the impact of public investment in developing economies gives inconsistent results on whether it complements or crowds out private investment. Applying several pooled specifications of a standard investment model to a panel of developing economies for 1980 to 1997, this study finds that public investment complements private investment, and that, on average, a 10 percent increase in public investment is associated with a 2 percent increase in private investment. The results also indicate that private investment is constrained by the availability of bank credit in developing economies. The same empirical models are run on a panel of developed economies. In contrast to developing economies, public investment crowds out private investment in developed economies. The results show that in a number of important ways, private investment in developed economies is influenced by different factors than private investment in developing economies.

Keywords: developing economies; investment; capital markets; credit; public expenditure (search for similar items in EconPapers)
Date: 2005
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