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The response of private investment to an increase in public investment

Author

Listed:
  • Mario Alloza
  • Danilo Leiva-León
  • Alberto Urtasun

Abstract

Since the 2008 crisis, public investment as a proportion of GDP has declined significantly both in Spain and in other euro area countries. That trend recently came to an end, given that public expenditure has been bolstered in response to the health crisis and will be further reinforced in Spain by the EU funds received under the Next Generation EU (NGEU) programme. Public investment's effect on economic activity will depend, among other factors, on its impact on private investment, the sign of which is, a priori, ambiguous. This article assesses the short-term relationship between public and private investment using the structural vector autoregressive (SVAR) approach. The results suggest that, on average, increases in public investment in Spain tend to generate a positive impact on private investment. In particular, an increase of 1% in public investment would be associated with an equivalent increase in private investment in the short term. This finding underscores the important role that NGEU could play in economic developments in the years ahead.

Suggested Citation

  • Mario Alloza & Danilo Leiva-León & Alberto Urtasun, 2022. "The response of private investment to an increase in public investment," Economic Bulletin, Banco de España, issue 2/2022.
    • Handle: RePEc:bde:journl:y:2022:i:02:d:aa:n:11
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    References listed on IDEAS

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    More about this item

    Keywords

    public investment; NGEU; private investment; vector autoregression.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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