Do the components of government expenditure affect the long-run dynamics of private investments? A heterogeneous panel analysis with a multifactor error structure

ABSTRACT

Using data on 30 OECD countries over 1993–2019, this paper examines the ties between the components of government expenditure and the supply side of the private sector. We employ an ECM version of the novel dynamic common correlated effects estimator (DCCE) in order to account for nonstationarity, country-heterogeneity, and cross-sectional dependence. The estimates suggest that allocating public resources toward general public services and health positively affects the long-run dynamics of private investments. Conversely, rises in the expenditure on housing and social protection are associated with significant crowding-out effects.

KEYWORDS:

• Common correlated effects
• Dynamic panels
• Government expenditure
• Private investments
• Fiscal policy

JEL CLASSIFICATION:

• E20
• E60
• H50

Disclosure statement

No potential conflict of interest was reported by the author(s).