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Assessing the contribution of public capital to private production: Evidence from the German manufacturing sector

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  • Andreas Stephan

Abstract

Using time-series cross-section data from the manufacturing sector of the 11 West German 'Bundeslander' (Federal States) from 1970 to 1996, I examine the impact of public capital on private production. My econometric analysis explicitly takes into account four of the most frequent specification issues in the context of time-series crosssection data analysis: serial correlation, groupwise heteroscedasticity, cross-sectional correlation and non-stationarity of data. For all approaches and tested specifications, I find that public capital is a significant input for production in the manufacturing sector. Moreover, I find that differences in public capital endowment can explain long-term differences in productivity across the Bundeslander. One tentative conclusion that can be drawn from this finding is that differences in public capital endowment might also explain a part of the still-existing productivity gap between manufacturing in East and West Germany. However, I emphasise that the existence of positive effects of public capital on private production is a necessary, but not a sufficient condition for concluding that public investments should be boosted in the future.

Suggested Citation

  • Andreas Stephan, 2003. "Assessing the contribution of public capital to private production: Evidence from the German manufacturing sector," International Review of Applied Economics, Taylor & Francis Journals, vol. 17(4), pages 399-417.
    • Handle: RePEc:taf:irapec:v:17:y:2003:i:4:p:399-417
    DOI: 10.1080/0269217032000118747
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