Macroeconomic Rates of Return of Public and Private Investment: Crowding-In and Crowding-Out Effects

Abstract

Using annual data from 14 European Union countries, plus Canada, Japan and the United States, we evaluate the macroeconomic effects of public and private investment through VAR analysis. From impulse response functions, we are able to assess the extent of crowding-in or crowding-out of both components of investment. We also compute the associated macroeconomic rates of return of public and private investment for each country. The results point mostly to the existence of positive effects of public investment and private investment on output. On the other hand, the crowding-in effects of public investment on private investment vary across countries, while the crowding-in effect of private investment on public investment is more generalised.

Keywords: Fiscal policy, public investment, private investment, impulse response, vector autoregression, European Union

JEL Classification: C32, E22, E62