Public/private investment linkages: A multivariate cointegration analysis

Abstract

The link between public and private investment is investigated using annual data of the period from 1964-65 to 2004-05. The estimates based on structural cointegration approach indicate that both are cointegrated and public investment crowds in private investment. The study then used the Harris, et al. (2003) test to identify whether the existing cointegration vector is stationary or heteroscedastic. The findings of the analysis suggest that private investment can be enhanced by increasing public expenditures in infrastructure. The results of this study support the complementarity hypothesis, which states that stock of public capital crowds in private capital accumulation by increasing the return to private capital in private production technology.