Public capital and private production in Australia.

Summary

---

The Australian economy is analyzed to examine the nature of private production and its dependence upon public capital. Using short- and long-run components of the data, the cointegration analysis estimates the elasticity of public capital at approximately 0.17, one half of that of private capital. The short-run analysis rejects the contention that the long-run relationship arises only because public capital is endogenous and directly related to private production.

See the full content of this document

Extract

---

Public capital and private production in Australia.

I. Introduction

Recent empirical research by Ratner [31], Aschauer [4; 5] and others seeks to demonstrate that publicly provided capital should enter as a complementary input to private production.(1) The general approach of these studies is to specify and estimate a functional form for private production which is dependent upon both private inputs to production and some measure of public capital. With few exceptions, see for instance Holtz-Eakin [18], across a variety of economies and at different levels of aggregation, public capital is shown to be a significant input to private production.

This paper uses a newly constructed quarterly data set for the Australian economy to examine two specific criticisms levelled at many of the previous empirical studies. The first is the possibility that the estimated relations reflect a spurious correlation between variables with purely coincidental low frequency movements; that is, the variables are non-stationary and the regressions are spurious. This criticism is addressed by Aschauer [3] where he argues that his previous results are valid even if the variables are non-stationary. More recently, Clarida [10] and Lynde and Richmond [21] use techniques suitable for non-stationary variables to confirm Aschauer's [4] results for the United States as well as for a number of European countries. We also employ co-integration techniques, those developed by Phillips and Hansen [29] and Hansen [17], to estimate a production function for the private economy in Australia during the post-war period.

The second issue we address is the question of causality between public capital and private production. Aschauer [4] argues that causality runs from public capital to private output (or private factor productivity). However, an equally plausible interpretation of the estimated relationships is that they reflect the response of public investment to private production; in other words, public capital stocks are possibly endogenous. This endogeniety may arise from various political constraints on public expenditure or, alternatively, the relationship may reflect aspects of the public decision-making process where public investment decisions are a response to private output growth or possibly private investment. To examine this second cri...

See the full content of this document

---