P.S.P.l/10-2-96
I
I I
ENCUENTRO
DE
ECONOMIA
PUBLICA
Depa amen o de
Teo ía Económica
y
Economía Polí ica
Uni e sidad
de
Se illa
Se illa
9, 10 de eb e o de 1995
PONENCIA
Public
spending,
p í a e
in es men ,
and
g ow h
in
O.E.C.D.
coun ies:
an
empi ical
in es iga ion.
Isabel
ARGIMON MAZA
Banco
de
España
José
Manuel
GONZÁLEZ-PÁRAMO
Banco
de
España.
Depa amen o de
Hacienda
Pública
Uni e sidad
Complu ense
José Ma ía
ROLDAN
Eu opean
Mone a y Ins i u e
Summa y:
This
pape
is conce ned
wi h
he empi ical ela ionship be ween go e nmen spending
and
p í a e
in es men . A panel o 14
OECD
coun ies is used. We p esen e idence
which
sugges s he exis ence o a signi ican c owding-in e ec o
p í a e
in es men by public
in es men , h ough he posi i e impac o in as uc u e on
p í a e
in es men p oduc i i y.
Mo eo e , go e nmen consump ion appea s o c owd ou
p í a e
in es men . The implica ions
o
hese
esul e a e o o emos impo ance when i comes o
iscal
consolida ion.
Dé ici
educ ions enginee ed h ough cu e in public in es men could se e ely impinge upon
p í a e
capi al
accumula ion and g ow h p ospec e.
Resumen:
Es e
abajo analiza la
elación empí ica
exis en e
en e
el
gas o
público
y la
in e sión
p i ada en un panel de 14
países
pe enecien es a la
OCDE.
La e idencia
p esen ada sugie e la exis encia de un signi ica i o e ec o "c owding-in" de la
in e sión
pública,
que ope a a
a és
de la complemen a iedad
en e
las in aes uc u as y la
in e sión
p i ada. Po o a pa e, el consumo
público
pa ece eje ce un "e ec o
expulsión"
de la
in e sión
p i ada. La implicaciones de
es os
esul ados son de g an
ascendencia en ma e ia de
consolidación iscal.
Reducciones del
dé ici
conseguidas
median e eco es en la
in e sión pública pod ían daña
se e amen e la
acumulación
de
capi al
y las pe spec i as de c ecimien o.
1.
INTRODUCTION:
FISCAL POLICY,
GROWTH,
AND
CROWDING
OUT
In
his
pape
we
in es íga e
he ela ionship be ween
p í a e
in es men and
go e nmen spending.
Empi ical
e idence is b ough o bea upon wo closely ela ed
ques ions
which
lie a he co e o he
deba e
on he mac oeconomic e ec s o
iscal
policy:
1) Is public spending p oduc i e? 2) To wha ex en , i any,
does
go e nmen
spending subs i u e o
p í a e
in es men ?
The
i s
ques ion has s imula ed a conside able amoun o esea ch
sin
ce
Rubinson
(1977)
and Ram
(1986)
ound a posi i e empi ical ela ionship be ween
go e nmen size and GDP g ow h. Al hough his associa ion has
al
so been ob ained in
mo e ecen wo k (see Lin, 1994a), a numbe o pape s ha e iden i ied an in e se
associa ion be ween go e nmen spending and
ou pu
g ow h (e.g. G ossman, 1988,
Mallow,
1986, Peden and
B adley,
1989, and
G ie
and
Tullock,
1989).
In a ca e ul and
comp ehensi e analysis o his issue,
Dow ick
(1993)
concludes
ha
go e nmen size
does
no
appea
o ha e a sys ema ic and signi ican e ec on g ow h.
This
li e a u e has been
c i icized
on
h ee
main g ounds.
Fi s ,
as shown by
Hsieh
and
Lai
(1994)
and
Dow ick
(1993),
he sign o he associa ion is qui e sensi i e
o he choice o he sample o coun ies, he pe iod unde s udy, he econome ic
echniques and he exis ence o measu emen p oblems. Second, as di e en ca ego ies
o
spending a e
well
documen ed o ha e di e se economic e ec s, analyses igno ing
his
ac a e no easy o in e p e .
Eas e ly
and Rebelo
(1993)
and Lin (1994b), o
example,
show
ha
spending ca ego ies
ha
p omo e
human o physical capi al
accumula ion
a e posi i ely associa ed
wi h
g ow h,
while
o he spending i ems ha e
nega i e o neu al e ec s.
Finally,
he single equa ion indings on he go e nmen -
size/GDP-
g ow h
link
could be
in alid
when his ela ionship uns h ough indi ec
channels, i.e.
p í a e
in es men .
These
empi ical sho comings ha e a di ec bea ing on he second ques ion. Since
capi al
accumula ion is he engine o
ou pu
g ow h, any c owding-ou e ec s o
p í a e
in es men by public spending impinge upon p oduc ion
expansión
and wel a e
p ospec e. The bulk o he empi ical li e a u e inds a signi ican ly nega i e e ec o
public
consump ion on g ow h
while
he e ec s o public in es men a e ound o be
posi i e
al hough less obus
(Ba o,
1991;
G ie
and
Tullock,
1989;
Eas e ly
and
Rebelo,
1993).
To wha ex en can
hese
esul e be aced o a c owding ou o
p í a e
in es men ? Aschaue (1989b) inds
ha
he di ec c owding-ou e ec o public
in es men is ou weighed by a di ec c owding-in e ec associa ed
wi h
he ole o
public
capi al as a p oduc i e inpu and i s complemen an e0
wi h
p í a e
capi al (see
Aschaue ,
1989a). The e idence ga he ed in E enbu g
(1993),
who es ima es a simple
mac omodel
wi h
a ional expec a ions, and in E enbu g and Woha
(1995),
ein o ces
his
conclusión,
while
he esul e in
Bai am
and
Wa d
(1993)
suppo
he c owding-ou
hypo hesis. As o he impac o go e nmen consump ion, Aschaue (1989b) concludes
ha
i s c owding-ou e ec on
p í a e
in es men ca ies only a ma ginal explana o y
powe , a esul
ha
could be in e p e ed as an indica ion
ha
public consump ion is a
cióse
subs i u e o
p í a e
consump ion. Howe e , ecen e idence ga he ed by
Ka as
(1994)
o ce ully
sugges e
ha
p í a e
and go e nmen consump ion a e
bes
desc ibed
as complemen a y (o un ela ed)
goods(2),
a ea u e
ha
ein o ces he c owding-ou
e ec
o
p í a e
in es men .
The
es o he
pape
is o ganized as
ollows.
Sec ion
II
ou lines he heo e ical
a gumen e
behind he c owding-ou hypo hesis. Fo exposi ional pu poses, we use a
simple
o e lapping-gene a ions model in
which
public and
p í a e
capi al a e
complemen e, whe eas public and
p í a e
consump ion a e
independen
Sec ion III
e alua es he impac on
p í a e
in es men and
p í a e
p oduc i i y o public spending.
The
empi ical esul e ob ained
wi h
a panel o 14
OECD
coun ies a e p esen ed and
b ie ly
discussed.
Finally,
Sec ion IV d aws he main conclusions.
2. PRIVATE INVESTMENT AND PUBLIC EXPENDITURE
The
equilib ium app oach de eloped in Aschaue
(1988)
and Aschaue and
G eenwood
(1985),
among o he s, assumes a compe i i e economy popula ed by
a ional,
iden ical,
in ini ely
li ed
indi iduáis.
In his con ex , he gene al equilib ium ela ionship
be ween public spending and
p í a e
in es men may be exp essed in he ollowing wo
equa ions:
(1
Public and
p í a e
capi al a e "complemen a y" when he ma ginal
p oduc i i y o he
p í a e
capi al inc eases as he quan i y o public
capi al
inc eases.
(2)
I public consump ion inc eases he ma ginal u ili y o
p í a e
consump ion, bo h a e said o be "complemen a y", and ice e sa.
3
i
=
i( k,ig,cg),
i,>0, z2<0, z3^0 (1)
k
=A(Up,
u<Q. ¿&
(2)
whe e
i is
p í a e
spending, k is he ma ginal p oduc o
capi al,
ig and cg a e public
in es men and public consump ion, espec i ely, k is
p í a e
capi al and kg is public
capi al.
Along
neoclassical
lines,
changes in in es men
-which
a e desc ibed by he
pa ial
de i a i es o he abo e unc ions- a e he esul o in e empo al smoo hing o
consump ion by
p í a e
agen s.
Aschaue s
discussion o he c owding-ou issue is heiuis ic, due o he
complexi y
o
his
analy ic
amewo k. None heless, his quali a i e conclusions ca y o e
in
much simple neoclassical models. Suppose
ha
ou economy is popula ed by
o e lapping
gene a ions o equal
size.
Each
household
li es
o wo pe iods. Households
ea n
labou income only in he
i s
pe iod. Labou supply is
ixed.
Consump ion o a
ep esen a i e household when young in ime is:
c,1
= w, - , - s, , (3)
whe eas consump ion when oíd a ime +1 can be w i en as:
<Á=í,(K+1),
(4)
whe e
w, is he wage a e, s is sa ings, +I is he in e es a e in he second pe iod and
, is a ax
le ied
on he young. The go e nmen uses ax e enues o inance public
consump ion o a public good na u e
-which
en e s household's
u ili y
unc ion- and
public
in es men
-which
is a p oduc i e inpu in
p í a e
p oduc ion.
Suppose
ha
he
u ili y
unc ion o a ep esen a i e
agen
is:

U
=
hLnc¡
+ (l- yMC
+_L[5I/ic,2+1
+
(1-8)1^,
(5)
whe e cg is public consump ion, 6
ep esen e
ela i e p e e ence o
p í a e
consump ion
and p is he a e o ime p e e ence. Maximiza ion o
(5)
subjec o (3) and (4) yields
he sa ings unc ion:
s = o(w, - ), a=_L . (6)
Fo
simplici y,
assume
ha
bo h
p í a e
and public capi al
ully
dep ecía e
in
e e y
pe iod. The p oduc ion unc ion in pe wo ke e ms is:
y =
Ai,ai¡
, a+p<l , (7)
whe e i is
p í a e
capi al (and
p í a e
in es men ) and ig is public capi al (and public
in es men ).
Compe i ion in ac o ma ke e implies:
l4
=CL4/;%p
-<¿ (8)
w
-(l-a)Ai?i¡
-(l-c y
. (9)
Capi al
a ailable o p oduc ion in +1 equals sa ings o he young in .
This
gi es he
momen a y equilib ium condi ion:
^
=
0(1
-a)M?i¡
~ o , . (10)
This
equa ion,
oge he
wi h
he go e nmen
budge
cons ain
+
i, • CID
de ine he equilib ium o he economy.
A
pe manen ax- inanced inc ease in public consump ion educes bo h
i s -
pe iod
p í a e
consump ion and sa ings, and hus in es men in he nex pe iod. In he
long- un, a e d opping ime subsc ip e, we ob ain:
5
di_
de
l-oa(l-cO¿/a-1//
<
O ,
(12)
g
p o ided
ha
he economy is no oo a away
om
he golden ule (no e
ha
when =0,
by equa ion 8 he
denomina o
in 12 educes o
l-o(l-a)).
As his c owding-ou e ec
gene a ed
by public consump ion is associa ed
wi h
he e ec o axes upon sa ings, a
ax- ínanced
inc ease in public in es men mus also
p oduce
a di ec c owding-ou
e ec o
p í a e
in es men Howe e , public in es men may ha e an addi ional e ec
p í a e
in es men is c owded-in whene e public capi al aises he p oduc i i y o
p í a e
capi al. In ac , i he
ini ial le el
o public capi al we e
well
below i s op imal
(i.e.
ou pu -maximizing)
le el,
he c owding-in e ec would ou weigh he nega i e
in luence o axes upon sa ings. Mo e gene ally, he
s eady-s a e
e ec o an inc ease
in
public in es men upon
p í a e
capi al accumula ion is:
In
he mo e
elabó a e
Aschaue model his ambigui y
eme ges
as
well.
The
di e ences a e jus a
ma e
o de ail. When public and
p í a e
capi al a e equally
p oduc i e, an inc ease in public in es men c owds ou an equi alen
amoun
o
p í a e
in es men ,
wi h
no e ec s upon weal h and consump ion. Howe e , an addi ional
c owding-ou e ec would a ise i public in es men we e mo e p oduc i e: as li e ime
weal h
inc eases so
does
consump ion
oday.
These wo sho - un e ec s could be
compensa ed
by he c owding-in e ec
which
ope a es
h ough an inc ease in
p í a e
capi al
p oduc i i y. As o he
consequences
o an inc ease in public consump ion,
Aschaue admi s he possibili y
ha
i s e ec could be nil. I public consump ion is a
pe ec
subs i u e
o
p í a e
consump ion o he ma ginal p opensi y o consume ou o
weal h
emains
cons an
o e ime o e e y
agen ,
p í a e
in es men
changes
would
no be
needed
o smoo h ou consump ion. None o
hese
assump ions a e
made
in ou
simple exposi ional model(3).
('
These
models
a e no
di ec ly
compa able.
No e
ha
we a e
assuming
ha
public
and p í a e
consump ion
a e
nei he
complemen a y
ño
subs i u es.
On he
o he
hand,
wi h
income
acc uing
only
in he
i s
pe iod
and a
ixed
p opensi y
o
sa e,
c owding
ou
ob ains
e en
i he
ma ginal
p opensi y
o
consume
emains
cons an .
In
such
case,
which
implies
= p, p í a e
in es men
is
c owded-ou
by
[l-a(l-p)
]"'
uni s
pe
di
a[l-P(l-aMí°í/"']
<
(13)
l-oaO-cOA--1//
>
6
3. DATA, METHODOLOGY
AND
EMPIRICAL RESULTS
The
empi ical analysis
is
ca ied
ou
using
he
annual ime-se ies-c oss-sec ion
da a om Summe s
and
Hes on
(1991).
Only
he
ou een
OECD
coun ies
wi h
a ailable
da a
on
in as uc u e capi al we e included
o he
pe iod 1979-88(4),
which
esul ed
in
an
unbalanced panel da a
se
Da a de ini ions
a e
gi en
in he
Appendix.
Ou
analysis
o he
c owding-ou hypo hesis
is
based
on he
es ima ion
o he
ollowing
pai
o
equa ions:
+^ o**+Vln**
+4* (15)
whe e subsc ip s
e e
o
ime and
j o
coun y,
i and
ig
a e,
espec i ely,
p í a e
and
public
in es men
in
ela ion
o
p í a e
p oduc i e capi al s ock
(p í a e
and
public
in es men a es),
cg is
public consump ion,
in
ela ion
o
p í a e
p oduc i e capi al
s ock,
k is
ma ginal
p í a e
capi al p oduc i i y
(which
is
p oxied
by he
a io
o
g oss
ope a ing su plus
o
p í a e
p oduc i e capi al s ock),
k
is
he
s ock o
p í a e
p oduc i e
capi al
and kg is
in as uc u e capi al,
so
ha
no
esiden ial in es men
is
in ol ed(5).
We
would expec
2^
o be
posi i e,
and
bo h
a3 and a4 o be
non-posi i e unde
he
c owding-ou hypo hesis.
On he
o he hand, gi en
he
s anda d assump ion
o
dec easing ma ginal p oduc i i y,
b2 is
expec ed
o be
nega i e,
and b3
posi i e
i
in as uc u es
and
p í a e
p oduc i e capi al
a e
complemen e.
uni
o addi ional go e nmen consump ion spending.
(4)
The coun ies and he pe iods a e he ollowing
ones:
Aus alia
(1979-87),
Aus ia
(1979-87), Belgium (1979-87),
Canadá
(1979-88),
Denma k
(1979-88),
Fede al
Republic o
Ge many
(1979-88),
Finland
(1979-87),
F ance
(1979-88),
I eland
(1979-87), No way (1980-86),
Spain
(1979-86), Sweden (1979-87), Uni ed Kingdom (1979-87) and Uni ed
S a es (1980-87).
(5)
Un o una ely, ou da a do no allow p i a e and public
in as uc u e
o be sepa a ed ou . I may be a gued ha bo h
ypes
o
in as uc u e
should ha e oughly he same
e ec s
on p oduc i i y. In
any
case, his ac has o be bo ne in mind when in e p e ing he esul s.
7
The
econome ic analysis
o
he c owding-ou issue equi es he use
o
echniques
well
sui ed o deal
wi h
coun y he e ogenei y. Le us
i s
e e o he mos ec ic i e
e sión
o
(14)
and
(15).
Assume
ha
a^, = am and b^, = bm, Vj
V :
ha
is, he esponse
o
p í a e
in es men and
p í a e
capi al p oduc i i y o he igh -hand side a iables
does
no change o e ime ño ac oss coun ies. The esul e o such a es ic i e model
a e p esen ed in column (1) o
Table
1. In columns (2) o (6) we elax
hese
es ic ions
so as o ake in o accoun he he e ogenei y o he da a. In column (2) we epo he
esul e o le ing a, and b, change ac oss coun ies
while
aking he emaining
coe íícien e
o be he same ac oss coun ies. The es ima es co espond o a
íxed
e ec s
model
wi h
coun y dummies, and a e he e o e a
wi hin
es íma e.
The dummy
coe icien e
a e no epo ed. In o de o choose be ween he mos es ic i e model and
he
wi hin
es ima es, an F
es
is ca ied ou , whose esul e a e epo ed in he lines
headed by
F^.
In column (3) we epo he es ima es o he model in
i s
di e ences.
Such
an app oach no only akes in o accoun
íxed
e ec s,
which
d op
ou when he
model is speci ied in
i s
di e ences, bu may be ega ded as a way o dealing
wi h
non-s a iona i y when his p oblem is
p esen í
Column (4)
epo e
he esul e ob ained
om
a andom e ec s model. The main di e ence
wi h
he
wi hin
es ima o is
ha
he
coun y speci ic e ec s a e now ea ed as andom and unco ela ed
wi h
he eg esso s.
A
Hausman
es
is cons uc ed o check o his es ic ion,
wi h
he esul e shown in he
ow
labeled %2 in able
l^.
(6) This
es
is
o mula ed
as:
SSRR
-
SSRU/(ku
- k ) _ p
SSRU/(T
_ o) ~ ( e
-M.
(T- u)
whe e
U and R
s and
o he
un es ic ed
and he
es ic ed
model,
espec i ely,
SSR is he sum o
squa ed
esiduals,
k is he
numbe
o
es ima ed
coe icien s
and T is he
o al
numbe
o
obse a ions.
^
The
Hausman
es
is
o mula ed
as:
whe e
pw is he
ec o
o he k
wi hin-g oup
es ima es,
PGLS
is he
co esponding
gene alized
leas
squa es
es íma e o he
andom
e ec s
model,
and Vw and
VGLS
a e
hei
espec i e
es ima ed
a iance-co a iance
ma ices.
Unde
he nuil
hypo hesis
o no có ela ion ( he
andom
e ec s
8
B.
INSTRUMENTAL VARIABLES ESTIMATES
TABLE
Al. CROWDING-OUT
EFFECTS
INSTRUMENTAL
VARIABLE
ESTIMATION
(1979-88)
(1) (2) (3)
li
0.80
(4.92)*'
0.74
(4.68)"
0.80
(5.00)**
eq(l) -0.07
(0.13)
-0.62
(1.36)
-1.02
(2.28)** -1.05
(2
66V*
eq (z)
ln(k/l)j
-0.56
(A
A<C **
(4.ÜO)
1.07
(6.29)'*
o
eq (1)
eq (2)
0.024
0.041
0.024 0.024
xj 112 112 112
a:
s anda d e o o he eg ession
The
ins umen s used a e
aA,
c,., and in equa ion (1) and ln
(k/1),.,
and ln
(kg/1),
in
equa ion (2). Coun y dummies whe e included in bo h equa ions as ins umen s.
15
•
:; ¿
:
."
i
w
BIBLIOTECA

C.
PRODUCTION
FUNCTION
EQUATION
The
es ima ed equa ion is gi en by
ln
(yll) = a +
(1
-a-p) n[kll + p
ln[£//]
whe e
so ha again he es ic ion o cons an e ums o scale has been imposed(10). The
esul e a e p esen ed in able A2. The
inclusión
o a ime end, , aiming a cap u ing
echnological
change, esul e in he es ima es shown in columns (2), (4), and
(6).
The
andom e ec s model seems o be he one ha i e
be e
he da a. The posi i e and
s a is ically
signi ícan
sign o he in as uc u e a iable seems o be p esen in all
models, excep unde column (4). Howe e , in ha case, he end a iable is no
s a is ically
signi ícan
ei he , so ha he speci ica ion seems o be ejec ed by he da a.
The
ac ha he andom e ec s model canno be ejec ed s a is ically may be a
e lec ion
o he ac ha he echnological he e ogenei y among he di e en coun ies
is
no di ec ly ela ed o he di e en
ini ial
s a es o he echnology. In ac , i could be
iden ical
o all coun ies, and he
indi idual
e ec s could be ela ed o o he aspec o o
he economic en i onmen .
Looking
a columns (5) and (6) i may be concluded ha , al hough he
ou pu
elas ici y
wi h
espec o in as uc u e is smalle ha he elas ici y
wi h
espec o
p i a e
capi al, he esul e
imply
again ha he e is c owding in o public in es men ,
h ough i s posi i e impac on p i a e
p oduc i i y.
This
esul ein o ces hose p esen ed
in
Table
1.
The
es s
o he hypo hesis o cons an e ums o scale a e no
comple ely sa is ac o y, e en when he wi hin es ima o is conside ed.
Howe e ,
gi en he speci ica ion o he p oduc i i y unc ion i
seems
mo e easonable o ha e cons an e u ns o scale.
16
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