Effects of government spending on private investment

Abstract

This paper investigates the effects of military and non-military public expenditures on gross private investment using cointegration and error-correction analysis. The latter type of public spending is disagreggated into expenditures of infrastructure, consumption and other general government expenditures. The empirical evidence from four emerging European countries namely, Greece, Ireland, Portugal and Spain suggests that in some cases public capital spending stimulates investment, while in others it depresses it. Also, the results tentatively indicate that defence spending exerts no influence on private investment, thus adding to the ongoing controversy of the economic effects of military spending.