The dynamic effects of public investments on private capital formation: Modelling a heterogeneous asymmetric cointegration with unobserved global factors

Abstract

Using quarterly data on a panel of 14 OECD economies over 1960–2023, we model heterogeneously the nexus between public investments and private capital formation, allowing for asymmetric cointegration, fiscal feedback and addressing cross-sectional dependence. We find that: i) public investments crowd-in private investments in the short- and the long-run; ii) the private sector responds asymmetrically to expansions and reliefs in the flow of public capital; iii) the adjustments to the country-specific equilibrium paths depend on the way global shocks and local spillovers are modelled; iv) the effects of public investments could be partially offset if fiscal policy is used aggressively.