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Descrição Detalhada da Publicação
Public investment, economic performance, and budgetary consolidation: VAR evidence for the 12 Euro countries
Título Revista
Journal of Economic Development
Ano (publicação definitiva)
2011
Língua
Inglês
País
Coreia do Sul
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Abstract/Resumo
In a period of heightened concern about fiscal consolidation in the euro area, a politically
expedient way of controlling the public budget is to cut public investment. A critical
question, however, is whether or not political expediency comes at a cost, in terms of both
long-term economic performance and future budgetary contention efforts. First, common
wisdom suggests that public investments have positive effects on economic performance
although the empirical evidence is less clear. Second, it is conceivable that public investment
has such strong effects on output that over time it generates enough additional tax revenues
to pay for itself. Obviously, it is equally plausible that the effects on output although positive
are not strong enough for the public investment to pay for itself.
In this paper, we investigate these issues empirically for the first twelve countries in the
euro area using a vector auto-regressive approach. We conclude that the euro countries can
be gathered in four groups according to the nature of the economic and budgetary impact of
public investment. The first group includes Austria, Belgium, Luxembourg, and Netherlands,
where the economic effects are either negative or positive but very small and, therefore, cuts
will be harmless for the economy and effective from a budgetary perspective. The second
group includes Finland, Portugal, and Spain, where public investment does not pay for itself
and, therefore, cuts are an effective tool of budgetary consolidation although they are
harmful for the economy. The third group includes France, Greece, and Ireland where public
investment just pays for itself and therefore cuts are not an effective way of achieving
long-term budgetary consolidation and are harmful for the economy. Finally, the fourth
group includes Germany and Italy, where public investment more than pays for itself and,
therefore, cuts are not only harmful for the economy but also counterproductive from a
budgetary perspective.
Agradecimentos/Acknowledgements
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Palavras-chave
Public investment,Economic performance,Budgetary consolidation,Euro area