Government capital formation: Explaining the decline

Haan, de Jakob; Sturm, J.E.; Sikken, Bernd Jan

doi:10.1007/bf02707902

Cited by 77 publications

(65 citation statements)

References 10 publications

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“…Besides the technical budgetary argument mentioned before, i.e., the ease to reduce public investment, authors refer to electoral arguments: public investment is a less visible type of expenditure so, less political resistance exists when they are cut back (see, for example, Roubini and Sachs, 1989;Oxley and Martin, 1991;Sikken, 1996 andSturm 1998). In a nutshell: cutting public investment is perceived as less electorally punitive compared to reducing government consumption expenditures .…”

Section: Public Investment and Budgetary Variables: Is There Symmetry?mentioning

confidence: 99%

“…De Haan, Sturm and Sikken (1996) 7 use a panel data set of OECD countries. The dependent variable is either the share of government investment in GDP or in total government expenditures.…”

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confidence: 99%

“…A few authors do add dummy variables to capture situations of financial crises (for example, De Haan, Sturm and Sikken, 1996) or to impose regime shifts in the regressions (Turrini, 2004). Note also that several authors introduce political variables but the results are mixed.…”

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confidence: 99%

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Explaining public investment in Western Europe

Vuchelen

Caekelbergh

2010

Applied Economics

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Budgetary consolidations are considered the obvious explanation for the decline in public investment that most Western European countries experienced over the past three decades.However, regressions based on budgetary variables tend to overpredict public investment during the post 1990-period, i.e., when the budgetary stress eased.We supplement the budgetary consolidation approach to public investment with ideas from behavioural economics to explain why these investments do not increase when additional budgetary resources are available. We use the peak/end evaluation procedure to capture the frustration of voters as cuts in government consumption expenditures accumulate. This 'memory-effect' of budgetary consolidations implies that voters recall the previous peak government consumption expenditures. They remain discontent as long as current expenditures are below the peak value. When the budgetary situation improves, policy makers will choose to increase government consumption because this is electorally more rewarding. Public investment will thus decline when budgetary consolidations are imposed and will remain constant when additional budgetary resources emerge.We test for a memory-effect by introducing expenditure gaps in public investment regressions. These gaps equal the difference between the highest previously observed primary government consumption to GDP ratio and the current ratio. The regression results for most EU-countries support ou r assumption.

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Section: Public Investment and Budgetary Variables: Is There Symmetry?mentioning

confidence: 99%

“…De Haan, Sturm and Sikken (1996) 7 use a panel data set of OECD countries. The dependent variable is either the share of government investment in GDP or in total government expenditures.…”

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confidence: 99%

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Explaining public investment in Western Europe

Vuchelen

Caekelbergh

2010

Applied Economics

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“…As regards the calibration of the money-to-consumption ratios, we imputed the fractions of the monetary aggregate M1 held by the household sector over nominal consumption expenditure, which amount to, respectively, 1.34 and 0.42 per quarter. 10 Finally, the steady-state ratios of government debt over output are uniformly set equal to 2.40 per quarter, while the dividend income-to-output ratios are assumed to be zero in steady state.…”

Section: Calibrationmentioning

confidence: 99%

Assessing the Impact of a Change in the Composition of Public Spending: A DSGE Approach

Tchakarov

Straub²

2007

IMF Working Papers

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In 2007 all ECB publications feature a motif taken from the €20 banknote. Despite intense calls for safeguarding public investment in Europe, public investment expenditure, when measured in relation to GDP, has steadily fallen in the last three decades, evoking fears that economic activity may be correspondingly negatively a¤ected. At the same time, however, public consumption in the EU-12 countries has trended up. In this paper, we provide a macroeconomic assessment of the observed change in the composition of public spending in the euro area in a medium-scale twocountry dynamic stochastic general equilibrium (DSGE) model. First, we analyze the channels through which, both temporary and permanent public investment shocks generate larger …scal multipliers than exogenous increases in public consumption. Furthermore, we quantify the negative impact of a change in …scal stance, characterized by a permanent rise in public consumption and a permanent fall in public investment, keeping thereby the overall level of public spending constant. The key message of the paper is that calls for reversing the observed trend in the composition of public spending are well justi…ed. WO R K I N G PA P E R S E R I E S N O 7 9 5 / A U G U S T 2 0 0 7 1 Prepared for the conference on "Fiscal Stabilisation Policies in a Monetary JEL Classi…cation Numbers:F41, F42 Keywords:Public investment, Public consumption, Euro Area, DSGE models. ECB Working Paper Series No 795 August 2007Non-Technical Summary This paper analyzes the macroeconomic e¤ects of the observed change in the composition of public spending in the European Union (EU) since the 1970s-characterized by a continuous fall in public investment and a corresponding rise in public consumption when measured as shares of GDP-and concludes that calls for safeguarding public investment are well justi…ed.The paper is motivated by recent debates in the EU about the relative e¤ectiveness of public consumption versus public investment as demand management tools. In particular, the debate has focused on the veracity of the underlying hypothesis that public investment is a relatively more potent instrument of …scal policy than public consumption. If this were true-a notion that seems to be well espoused by the European Commission-then …scal consolidation strategies in EU countries should preferably not be implemented by cutting back on public investment because the latter generates higher rates of return than projects related to public consumption.Although there is a substantial empirical literature that attempt to identify the sources of these developments, there is still a lack of understanding of the nature and the impact of a change in the composition of public spending. Furthermore, the empirical literature is inconclusive, which type of public spending has a stronger impact on macroeconomic activity. In that sense, the paper attempts to …ll this void by providing a comparative qualitative and quantitative analysis of the relative strength of public consumption and public investment expen...

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“…A small rise occurred also in Greece. 5 De Haan et al (1996) report evidence that during fiscal contractions government capital spending is indeed reduced more than other categories of government spending. 6 Perhaps the most important concern is the direction of causality between public capital and aggregate output: while public capital may affect productivity and output, economic growth can also shape the 11 demand and supply of public capital services, which is likely to cause an upward bias in the estimated returns to public capital if endogeneity is not addressed.…”

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confidence: 99%