On the long run effect of public capital on aggregate output: Estimation and sensitivity analysis

We undertake a sensitivity analysis of the productivity of public capital under the aggregate production function approach. Several proxies are used for the private inputs and for public capital, several dummy variables are included to adjust for energy price shocks, newly revised data is studied, and Stock and Watson's dynamic OLS estimator is used. Our main results are that the productivity of public capital depends critically on the proxies used, the effects are typically smaller than the early estimates, and omitting the oil price shocks introduces significant upward bias in the measured productivity of public capital. First version received: January 1998/final version received: June 1999     

Dynamic effects of public investment: Vector autoregressive evidence from six industrialized countries

We analyze the dynamic relationship between public investment and output. Whereas existing empirical studies on the effects of public capital typically rely on single-equation models of the private sector, we investigate the role of public investment in an economy by examining impulse responses derived from vector autoregressions. Using data from six industrial countries, we specifically examine the following questions: does higher public investment lead to GDP increases; is there reverse causation from output to public investment; and what are the effects of expenditure-neutral budget shifts from public consumption to public investment. First version received: April 1999/Final version accepted: August 2000     

The relationship between regional value-added and public capital in Finland: what do the new panel econometric techniques tell us?

This article applies recently developed panel estimation techniques to estimate the elasticity of private production with respect to public capital in a regional framework. We use the widely applied production function approach and regional data from Finland for the 1975–2004 period. In contrast to many previous studies about the productivity of public capital, we focus especially on panel estimation techniques, showing that the results from commonly applied fixed effects OLS are probably biased and sensitive to a change of estimator. To get more reliable results, we use the panel DOLS and panel DSUR estimators. The results suggest that public capital has had a positive impact on private production.     

An empirical study on public capital spillovers from the USA to Canada

The effect of public capital on private sector productivity has received much attention in the literature. The impact of an adjacent country's public capital on domestic productivity has, however, not been previously examined. This paper attempts to fill this gap by examining the possibility of such spillovers from the USA to Canada. Due to close proximity of both countries, the hypothesis of the paper is that these spillovers are important. A production function model introduces US public capital as an exogenous variable and tests for its significance. The results indicate positive spillovers from the USA public capital to Canadian productivity.     

Employment shifts, economic reform and the changes in public/private sector wages in Mexico: 1987–1997

Over the last decade, the public sector in Mexico experienced substantial fiscal reform, divestiture of public enterprises, and the elimination of many regulations affecting pay and employment. This study analyzes the changes in the public/private sector differences in wages during the 1987–1997 period. The results from analyzing microdata from the Encuesta Nacional de Empleo Urbano show that relative public sector wages increased from 1987 to 1997. Most of the relative wage increase in the public sector can be explained by increases in the price of skills and by changes in sorting across sectors. The results have important public policy implications since they suggest that public sector workers earn more and their wages have grown faster than those of their private sector counterparts. As such, policies contemplating public sector reform should take into account the effect of these measures on the inter-sectoral income distribution and the overall economic growth. First version received: April 2000/Final version received: December 2000     

Contemporary issues in empirical public finance

This paper provides a brief overview to how the use of game theory and its derivative theories of information and incentives in public finance have expanded economists' methodological toolkit for predicting how procedural aspects influence strategies of participants as well as their overall performance. Moreover given that evaluation of public policy options, where policy failures can and do occur due to either inadequate incentive structure or the presence of constitutional and behavioural constraints, the objective of the essays in this symposium is to indicate the richness and diversity of empirical approaches that have been used to shed quantitative light on applied public finance issues. First version received: May 1999/final version received: June 1999     

The impact of public capital on the US private economy: new evidence and analysis

This paper presents new evidence on the impact of public capital on the productivity of the US private sector. Using a production function approach, we estimate the impact of public investment on private capital productivity, specifically addressing the empirical critiques of earlier studies. We find evidence of a cointegrating relationship in a dynamic specification of an empirical model that includes public infrastructure as a factor of production, indicating the existence of a long‐run relationship between the US public capital stock and the productivity of the private capital stock. The results are used to explore how the decline in the growth rate of the public capital stock would have affected the performance of the private sector.     

Estimating productivity and returns to scale in the US textile industry

In light of the textile industry's growing foreign competition, trade deficit and job loss, we estimate its productivity and efficiency for the period 1975–93 utilizing a variable elasticity of substitution production function. The results indicate that, despite job losses, the industry adjusted by increasing labor productivity and maintaining fairly stable profits. This performance does not warrant protectionist policies. However, with an elasticity of factor substitution less than one and decreasing, the impact of factor price increases could result in higher apparel prices and preference for cheaper imports. Furthermore, with an elasticity of capital output rapidly decreasing, significant technological improvements will be required to improve competitiveness since textile production is capital intensive. Recently revised rules on trade liberalization could increase competition in the industry. First version received: October 1999/Final version received: August 2000     

Regional productivity variation and the impact of public capital stock: an analysis with spatial interaction,with reference to Spain

In this article, we examine whether variations in the level of public capital across Spain's Provinces affected productivity levels over the period 1996 to 2005. The analysis is motivated by contemporary urban economics theory, involving a production function for the competitive sector of the economy (‘industry’) which includes the level of composite services derived from ‘service’ firms under monopolistic competition. The outcome is potentially increasing returns to scale resulting from pecuniary externalities deriving from internal increasing returns in the monopolistic competition sector. We extend the production function by also making (log) labour efficiency a function of (log) total public capital stock and (log) human capital stock, leading to a simple and empirically tractable reduced form linking productivity level to density of employment, human capital and public capital stock. The model is further extended to include technological externalities or spillovers across provinces. Using panel data methodology, we find significant elasticities for total capital stock and for human capital stock, and a significant impact for employment density. The finding that the effect of public capital is significantly different from zero, indicating that it has a direct effect even after controlling for employment density, is contrary to some of the earlier research findings which leave the question of the impact of public capital unresolved.     

The effects of public infrastructure on the cost structure of Spanish industries

This paper examines the impact of public infrastructures on the performance of Spanish private business at a disaggregated industry level. We use duality theory to recover the productivity effects of public capital by calculating the cost saving effects that are associated to public services. Using a translog cost function we present panel estimates for 14 Spanish industries during the period 1980–1991. Our results strongly suggest that public capital formation can be considered to be an instrument to improve competitiveness by reducing production costs. However, the results also indicate that there is a technologically induced labor saving effect through higher public investment. Furthermore, our estimates suggest that a distinction among industries is of importance because the effects of public infrastructures vary across industries considerably.     

Evidence of public capital spillovers and endogenous growth in Taiwan

This study reaffirms the empirical evidence of public capital spillovers and endogenous growth by using data for the period 1966Q3–2012Q3 in Taiwan. Avoiding the use of a 100% depreciation rate for generating public and private capital stock series that is applied in some related studies, this study estimates these series by using disaggregate data of various investment assets and applying their individual depreciation rates, as calculated by Jorgenson and Stiroh (2000). The results show that, first, (per capita) output, private capital stock, and public capital stock cointegrated in the sample period. Second, the contribution of private capital to output is 50% higher than that of public capital. Third, in the presence of significant and sizeable public capital spillover effects, growth in Taiwan is strictly endogenous. Finally, the dynamic model with a cointegration equation helps in studying some sensible short-run properties of the model and bi-directional effects among variables.     

A normative analysis of public capital

A normative analysis of short-term public capital investment is carried out using cost benefit analysis. This cost benefit approach explicitly incorporates the durability of capital into the computation and thus include an aspect of public capital omitted from previous studies which focus on productivity. Estimation methods used else where have been improved by properly handling several concerns that have been raised. In addition, this behavioural model yields many structural equations suitable for estimation which results in highly efficient parameter estimates. Although a small elasticity is found for public capital, the benefit is greater than the cost.     

On the interaction between public and private capital in economic growth

This paper introduces two forms of interaction between private and public capital in an endogenous growth model in which productive government expenditure takes the form of a stock-variable and public capital is used in part as an input in the production of final output and in part to increase its own supply. While the first form of interaction involves the stocks of the two capital-goods and takes place within the final output sector through the specification of the aggregate production function (Cobb?CDouglas vs. CES), the second one concerns the rates of investment in the two kinds of capital. The share of productive public expenditure devoted to output production can be either exogenous or endogenous. Our results suggest that when this share is exogenous, along the balanced growth path the optimal growth rate of the economy is a positive function of the degree of complementarity between the two forms of investment. When the share of productive public expenditure devoted to output production is endogenous, the public capital share in GDP becomes, along with the model??s preference parameters, an important determinant of the economy??s long run growth. We also find that the optimal growth rate is an increasing function of the elasticity of substitution between public and private capital inputs in goods production, and is independent of the complementarity/substitutability between the two forms of investment.     

Environment,public debt,and epidemics

We study whether fiscal policies, especially public debt, can help to curb the macroeconomic and health consequences of epidemics. Our approach is based on three main features: we introduce the dynamics of epidemics in an overlapping generations model to take into account that old people are more vulnerable; people are more easily infected when pollution is high; public spending in health care and public debt can be used to tackle the effects of epidemics. We show that fiscal policies can promote convergence to a stable disease-free steady state. When public policies are not able to permanently eradicate the epidemic, public debt, and income transfers could reduce the number of infected people and increase capital and GDP per capita. As a prerequisite, pollution intensity should not be too high. Finally, we define a household subsidy policy that eliminates income and welfare inequalities between healthy and infected individuals.     

Is there a Laffer curve between aggregate output and public sector employment?

This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output. Public employment crowds out private employment and output because its increase induces higher wages and taxes. The valuation of government output is also taken into account. While public employment affects total output and aggregate real demand in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is “small” and negative, when it is “large”. Using the annual data from 22 OECD countries over the period 1960–1996 and estimating and testing for threshold models and more commonly used specifications with multiplicative interaction terms give support to this nonlinearity hypothesis between public employment and private sector output. First version received: October 1996/Final version received: April 2000     

System estimates of potential output and the NAIRU

This paper proposes a new approach for estimating potential output and the NAIRU. The methodology models these key unobservable economic variables as latent stochastic trends within a trivariate system of observables comprising information on unemployment, GDP, and inflation. Identification is achieved through the use of a standard version of Okun's law and a Phillips curve. The performance of the procedure is investigated using Swedish quarterly data covering the time period 1970:1–1996:3. First version received: June 1997/final version received: September 1998     

Consumption-smoothing and the excessiveness of Greece's current account deficits

This paper investigates whether the sequence of current account deficits experienced in Greece over the 1950–1995 period have been excessive. The degree of excessiveness is gauged by comparing the actual current account series to an optimal current account measure derived from an intertemporal model of current account determination. The findings indicate that optimal consumption smoothing did not take place over the sample period suggesting that the existing restrictions to the free flow of capital were binding. More importantly the stock of net foreign liabilities was found to have been set on an unsustainable path following the 1989/90 balance of payments crisis yet there is clear evidence that this tendency has been gradually reversed during the last couple of years. First version received: October 1996/Final version received: November 1997     

R&D spillovers and productivity: Evidence from U.S. manufacturing microdata

This paper deals with the estimation of the impact of technology spillovers on productivity at the firm level. Panel data for American manufacturing firms on sales, physical capital inputs, employment and R&D investments are linked to R&D data by industry. The latter data are used to construct four different sets of `indirect' R&D stocks, representing technology obtained through spillovers. The differences between two distinct kinds of spillovers are stressed. Cointegration analysis is introduced into production function estimation. Spillovers are found to have significant positive effects on productivity, although their magnitudes differ between high-tech, medium-tech and low-tech firms. First version received: April 1997/final version received: April 1999     

The hidden economy in Spain – A monetary estimation, 1964–1998

The aim of this paper is to estimate the level and evolution of hidden income in Spain during the period 1964–1997. To this end, we employ the well-known monetary approach which supposes that the hidden economy is a response on the part of the economic agents to the tax burden, one which manifests itself in an excess of demand for currency. The estimation has been made on the basis of the ADL technique, an ECM and Johansen's cointegration approach. The period chosen was characterised by multiple institutional changes, an increase in the tax burden and wide-ranging financial liberalisation. This has obliged us to formulate a specific monetary model to estimate the hidden economy and is one of the original features of that model. First version received: February 1999/Final version received: March 2001