THE EFFECTS OF PUBLIC INVESTMENT ON PRIVATE INVESTMENT IN DEVELOPING ECONOMIES

  • Erden L
  • Holcombe R
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Abstract

The literature onthe impact of public investment in developingeconomies gives inconsis- tent results on whether it complements or crowds out private investment. Applying sev- eral pooled specifications ofastandardinvestment modeltoapanel of developingecono- mies for 1980 to 1997, this study finds that public investment complements private investment, and that, on average, a 10 percent increase in public investment is associated with a 2 percent increase in private investment. The results also indicate that private in- vestment is constrained by the availability of bank credit in developing economies. The same empirical models are run on a panel of developed economies. In contrast to devel- oping economies, public investment crowds out private investment in developed econo- mies. The results show that in a number of important ways, private investment in devel- oped economies is influenced by different factors than private investment in developing economies.

Author-supplied keywords

  • capital markets
  • credit
  • developing economies
  • investment
  • public expen-

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Authors

  • Lutfi Erden

  • Randall G Holcombe

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