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The Relationship between Public Expenditure and Private Investment in Developed and Developing Economies: Policy Implications Based on the Difference

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  • Van Bon Nguyen

    (University of Finance Marketing (UFM), Vietnam)

Abstract

Public spending is one effective instrument of fiscal policy in both developed and developing countries. Governments use it to overcome the cyclicality of the economy and to run the economy. However, it can crowd in or crowd out private investment. Is there a difference in the public expenditure – private investment relationship between developed and developing countries? This study looks for an answer by empirically investigating the effect of public expenditure on private investment for a group of 36 developed countries and a group of 98 developing countries from 2002 to 2019. The results by the two-step difference GMM Arellano-Bond estimator seem to be counter-intuitive. Public expenditure crowds out private investment in developed countries but crowds in it in developing countries. The study uses the FE-IV estimator and the PGM estimator to check the robustness of these estimates. The study suggests some arguments to explain the validity of the counter-intuitive results and policy implications for governments in both developed and developing countries.

Suggested Citation

  • Van Bon Nguyen, 2023. "The Relationship between Public Expenditure and Private Investment in Developed and Developing Economies: Policy Implications Based on the Difference," Hacienda Pública Española / Review of Public Economics, IEF, vol. 244(1), pages 37-55, March.
    • Handle: RePEc:hpe:journl:y:2023v:244:i:1:p:37-55
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    References listed on IDEAS

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    More about this item

    Keywords

    Public expenditure; Private investment; Developed countries; Developing countries.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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