Fiscal policy and private investment expenditure: a study of Australia and the United States

Abstract

The effect of government spending on private sector's investment and profitability is examined within the context of an open economy macro model. The empirical results of the study indicate that the private investment expenditure in Australia and the United States is ‘crowed out’ by government investment and government consumption, respectively. These results are in conflict with the hypothesis of fiscal neutrality. In addition, the empirical results of corporate profitability provide no support for the complementary relationship between public and private investment expenditure.