On the Substitution of Private and Public Capital in Production

35 Pages Posted: 3 Dec 2019

See all articles by Zidong An

Zidong An

International Monetary Fund (IMF)

Alvar Kangur

International Monetary Fund (IMF)

Chris Papageorgiou

International Monetary Fund (IMF) - Research Department

Date Written: November 2019

Abstract

Most macroeconomic models assume that aggregate output is generated by a specification for the production function with total physical capital as a key input. Implicitly this assumes that private and public capital stocks are perfect substitutes. In this paper we test this assumption by estimating a nested-CES production function whereas the two types of capital are considered separately along with labor as inputs. The estimation is based on our newly developed dataset on public and private capital stocks for 151 countries over a period of 1960-2014 consistent with Penn World Table version 9. We find evidence against perfect substitutability between public and private capital, especially for emerging and LIDCs, with the point estimate of the elasticity of substitution estimated closely around 3.

Keywords: Economic growth, Economic systems, Economic models, Financial crises, Economic functions, public capital, private capital, elasticity of substitution, production function, WP, economic Outlook, economy-wide, depreciation rate

JEL Classification: O11, O16, O23, E01, O4, L31, P, E2

Suggested Citation

An, Zidong and Kangur, Alvar and Papageorgiou, Chris, On the Substitution of Private and Public Capital in Production (November 2019). IMF Working Paper No. 19/232. Available at SSRN: https://ssrn.com/abstract=3496710

Zidong An (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alvar Kangur

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Chris Papageorgiou

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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