Modeling Government Investment and Economic Growth on a Macro Level: A Review

Posted: 18 Nov 1996

See all articles by Jan-Egbert Sturm

Jan-Egbert Sturm

KOF Swiss Economic Institute, ETH Zurich; CESifo (Center for Economic Studies and Ifo Institute)

Gerard H. Kuper

University of Groningen - Faculty of Economics and Business

Jakob de Haan

University of Groningen - Faculty of Economics and Business; De Nederlandsche Bank; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 1996

Abstract

This paper reviews empirical research on the impact of government capital spending on economic growth. The pros and cons of five different ways to model the relationship between public investment and economic growth are reviewed, while some estimation results are presented for illustrative purposes. We start with the production function approach in which the public capital stock is added as an additional input factor in a production function, which is then estimated at a national or regional level. Alternatively, a cost or profit function in which the public capital stock is included could be estimated by what we call the behavioral approach. A third way to examine the relationship between government investment and economic growth is the so-called VAR approach. By imposing as few economic restrictions as possible this approach tries to solve some of the problems raised by the production function and behavioral approach. The first three approaches are all based on time-series (or panel data). A fourth way to model the growth effects of public capital spending is to include government investment spending in cross-section growth regressions. Finally, some attempts to estimate the growth effects of public investment spending using structural econometric models are discussed.

JEL Classification: D78, E22

Suggested Citation

Sturm, Jan-Egbert and Kuper, Gerard H. and de Haan, Jakob, Modeling Government Investment and Economic Growth on a Macro Level: A Review (September 1996). Available at SSRN: https://ssrn.com/abstract=3510

Jan-Egbert Sturm

KOF Swiss Economic Institute, ETH Zurich ( email )

Zurich
Switzerland

HOME PAGE: http://www.kof.ethz.ch

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, 81679
Germany

HOME PAGE: http://www.cesifo.de

Gerard H. Kuper (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Jakob de Haan

University of Groningen - Faculty of Economics and Business ( email )

PO Box 800
Groningen, 9700 AV
Netherlands
+31 0 50 3633706 (Fax)

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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