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Pereira, A. M. & Pinho, M. F. (2011). Public investment, economic performance, and budgetary consolidation: VAR evidence for the 12 Euro countries. Journal of Economic Development. 36 (1), 1-20

A. M. Pereira and M. D. Pinho,  "Public investment, economic performance, and budgetary consolidation: VAR evidence for the 12 Euro countries", in Journal of Economic Development, vol. 36, no. 1, pp. 1-20, 2011

@article{pereira2011_1715018628503,
	author = "Pereira, A. M. and Pinho, M. F.",
	title = "Public investment, economic performance, and budgetary consolidation: VAR evidence for the 12 Euro countries",
	journal = "Journal of Economic Development",
	year = "2011",
	volume = "36",
	number = "1",
	pages = "1-20",
	url = "http://www.jed.or.kr/"
}

TY  - JOUR
TI  - Public investment, economic performance, and budgetary consolidation: VAR evidence for the 12 Euro countries
T2  - Journal of Economic Development
VL  - 36
IS  - 1
AU  - Pereira, A. M.
AU  - Pinho, M. F.
PY  - 2011
SP  - 1-20
SN  - 0254-8372
UR  - http://www.jed.or.kr/
AB  - 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. 
ER  -