On the Relationship between Public and Private Investment in the Euro Area

20 Pages Posted: 5 Mar 2014

See all articles by Christian Dreger

Christian Dreger

German Institute for Economic Research (DIW Berlin); European University Viadrina Frankfurt (Oder); IZA Institute of Labor Economics; Chinese Academy of Social Sciences (CASS)

Hans-Eggert Reimers

Hochschule Wismar

Multiple version iconThere are 2 versions of this paper

Date Written: February 2014

Abstract

This paper explores the long run relationship between public and private investment in the euro area in terms of capital stocks and gross investment flows. Panel techniques accounting for international spillovers are employed. While private and public capital stocks are cointegrated, the evidence is quite fragile for public and private investment flows. They enter a long run relationship only after fundamental drivers of private investment, such as demand and financing costs are included. According to the impulse response analysis, private investment reacts to shocks in public investment both in terms of stock and flow variables. In contrast, public investment is rather exogenous. Therefore, the lack of public investment might have restricted private investment and GDP growth in the euro area. The results have strong implications for the future direction of fiscal austerity programs to combat the euro area debt crisis.

Keywords: public and private investment, fiscal austerity, panel VAR

JEL Classification: C23, E22, E62

Suggested Citation

Dreger, Christian and Reimers, Hans-Eggert, On the Relationship between Public and Private Investment in the Euro Area (February 2014). DIW Berlin Discussion Paper No. 1365. Available at SSRN: https://ssrn.com/abstract=2403885 or http://dx.doi.org/10.2139/ssrn.2403885

Christian Dreger (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

European University Viadrina Frankfurt (Oder) ( email )

Frankfurt (Oder)
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Chinese Academy of Social Sciences (CASS) ( email )

Beijing, 100732
China

Hans-Eggert Reimers

Hochschule Wismar ( email )

FB Wirtschaft
Philipp-Mueller-Str. PF 1210
23952 Wismar
Germany
49-3841-753-601 (Phone)
49-3841-753-383 (Fax)

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