The Permanent and Transitory Effects of Budget Deficits on Private Investment in South Africa

Abstract

This paper investigates the effects of the permanent and transitory budget deficits on private investment for South Africa. Specifically, the paper utilizes cointegration and error-correction models (ECM) to explore the long-run relationship between permanent budget deficits, private investment and transitory budget deficits. The results from the study suggest that (i) there is a long run relationship between permanent budget deficits, private investment and transitory budget deficits and (ii) the transitory rather than the permanent component of the budget deficits is an important determinant of private investment for South Africa. Above all, the study finds that transitory budget deficits crowd out private investment for the period under consideration.

Notes

It is interesting to point out that both Bahamni-Oskooee (1999) and the present study used gross fixed capital formation as a measure of private investment for the respective countries under consideration.