Government Expenditures and Private Investment: Evidence from Turkey

Abstract

This paper examined the relationship between government expenditures and private investment, for Turkey (1967-2001) employing cointegration analysis of a multivariate system of equations. This method is applied in order to empirically estimate the long run relationship between government expenditures and private investment. The empirical evidences suggest that there is a long-run relationship between variables and government expenditures tended to crowd-out private investment. JEL Classification: E62 Keywords: Government Expenditures, Private Investment, Cointegration, Turkey Introduction In recent years, the relationship between the government expenditures and private investment has been investigated and several studies have been published. The impact of government expenditures on private investment is explained on two hands. On the one hand, an increase in government expenditures due to high government borrowing requirements displaces the private investment. This indicates the “crowding out” hypothesis. Hence, the high level of government expenditures crowds out private investment. On the other hand, since public investments enhance the marginal productivity of private capital, this increases the level of private investment (Mamatzakis, 2001) In the literature there are two types studies and all studies found different results on the effects of government expenditures on private investment. The contrasting results from different studies gave rise to several studies try to investigate the impact of government expenditures on private investment. Aschauer (1989); Mamatzakis (2001); Pereira (2001) ; Ghali (1998) Apergis (2000); Laopodis (2001); Karagol (2004) and Pereira (2001) used a disaggregate analysis in order to explain the relationship between disaggregate measures of government expenditures and private investment. On the other hand, only a few studies used an aggregate analysis. Lin (1994) states that increased in government expenditures made private investments costly because of competing the private sector in financing. The results strongly indicate that government expenditures crowd out private investment in Turkey. Following the above remarks, the purpose of this study is to investigate the relationship between government expenditures and private investments. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.