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Public Investment and Growth: testing the non-linearity hypothesis

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  • Trish Kelly

Abstract

This article explores the relationship between public investment and growth among 56 low and middle income nations during the 1980s. The theoretical grwoth iterature emphasizes that initial increments of public capital raise growth but, at some point, additional increments of public capital inevitably reduce growth by creating distortions in the private sector. Despite the provalence of the non-linearity hypothesis, the article undertakes the first econometric test of the hypothesized non-linear relationship between public investment and growth. The article's econometric analysis does not support the public investment non-linearity hypothesis. The article concludes that crowding out concerns may have been overstated in the literature.

Suggested Citation

  • Trish Kelly, 1997. "Public Investment and Growth: testing the non-linearity hypothesis," International Review of Applied Economics, Taylor & Francis Journals, vol. 11(2), pages 249-262.
    • Handle: RePEc:taf:irapec:v:11:y:1997:i:2:p:249-262
    DOI: 10.1080/02692179700000016
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    References listed on IDEAS

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    1. Alicia H. Munnell, 1991. "Is there a shortfall in public capital investment? An overview," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 23-35.
    2. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 329-379, National Bureau of Economic Research, Inc.
    3. Roubini, N. & Sala-I-Martin, X., 1991. "Financial development , the Trade Regime and Economic Growth," Papers 646, Yale - Economic Growth Center.
    4. Easterly, William R., 1989. "Policy distortions, size of government, and growth," Policy Research Working Paper Series 344, The World Bank.
    5. Eliana Cardoso, 1991. "Capital Formation in Latin America," NBER Working Papers 3616, National Bureau of Economic Research, Inc.
    6. Fischer, S., 1991. "Growth, Macroeconomics, and Development," Working papers 580, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. International Monetary Fund, 1989. "Government Expenditure and Economic Growth: An Empirical Investigation," IMF Working Papers 1989/045, International Monetary Fund.
    8. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Working Papers 3702, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Tamoya Christie, 2014. "The Effect Of Government Spending On Economic Growth: Testing The Non-Linear Hypothesis," Bulletin of Economic Research, Wiley Blackwell, vol. 66(2), pages 183-204, April.
    2. Presbitero, Andrea F., 2016. "Too much and too fast? Public investment scaling-up and absorptive capacity," Journal of Development Economics, Elsevier, vol. 120(C), pages 17-31.
    3. Agénor, Pierre-Richard & Bayraktar, Nihal & El Aynaoui, Karim, 2008. "Roads out of poverty? Assessing the links between aid, public investment, growth, and poverty reduction," Journal of Development Economics, Elsevier, vol. 86(2), pages 277-295, June.
    4. Trish Kelly & Meenakshi Rishi, 2003. "An empirical study of the spin-off effects of military spending," Defence and Peace Economics, Taylor & Francis Journals, vol. 14(1), pages 1-17.

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