Public Investment and Growth in Jamaica4 - Bank of … - best investment in jamaica

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Public Investment and Growth in Jamaica
Rohan Swaby1
Fiscal and Economic Programme Monitoring Dept.
Bank of Jamaica
2007
Abstract
This paper seeks to uncover the relationship between public investment and growth in
Jamaica. Here, public investment relates to capital expenditure by Central Government.
The relationship is established through the use of a VECM. It was found that although
public investment had a positive impact on GDP, it was not significant. Public investment
also crowed-out net private investment as it resulted in higher domestic private
investment but lower foreign domestic investment , with the latter effect being much more
substantial.
1 The views expressed are those of the authors and not necessarily those of the Bank of Jamaica.
Table of Contents
1. INTRODUCTION .....................................................................................................3
2. LITERATURE REVIEW .........................................................................................4
3. EMPIRICAL METHODOLOGY............................................................................5
3.1 VAR-VECM Model...........................................................................................5
4. DATA ..........................................................................................................................7
4.1 Stationarity .........................................................................................................8
5. ESTIMATION RESULTS AND ANALYSIS .......................................................10
5.1 Correlation and Causation..............................................................................10
5.2 Lag Length .......................................................................................................12
5.3 Cointegration....................................................................................................13
5.4 VECM Estimates .............................................................................................15
5.4 Impulse Response Functions ...........................................................................16
5.5 Variance Decomposition .................................................................................19
6. SCENARIO ANALYSIS .........................................................................................19
6.1 Forecast Results ...............................................................................................20
6.2 Scenario Results ...............................................................................................22
7. CONCLUSION ........................................................................................................22
8. APPENDIX...............................................................................................................24
8.1 Vector Error Correction Estimates ...............................................................24
8.2 Variance Decomposition .................................................................................26
8.3 VECM Representations ...................................................................................28
References.........................................................................................................................30
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1. INTRODUCTION
There are mixed views on the impact of fiscal policy with respect to stimulating
economic growth. On one hand, Keynesian economists believe that left alone an
economy would rarely operate at full employment and as such both fiscal and monetary
policy is needed to stimulate aggregate demand. On the other hand, Monetarist and
Classical economists believe that fiscal policy should be kept to a minimum due to its
potential to create inefficiency in the use of resources. However, most economists would
agree that there are situations when increasing government spending would be beneficial
and situations where less government spending would spur growth. This is exemplified
by the Rahn curve, which shows that when government spending is zero there is little or
no growth, however after a certain point, increasing government spending results in lower
growth.
It is argued that government spending can bolster economic growth by putting money in
the hands of the public. This is as public investment may lead to an increase in
employment which should multiply throughout the economy. Public investment in
infrastructure development may provide an incentive for further investment by the private
sector. However, public investment could also lead to a crowding-out of private
investment which would have negative implications for growth. It is in this context that
the paper seeks to uncover the relationship between public investment and growth in the
case of Jamaica. Here, public investment relates to capital expenditure by Central
Government. This was done with the use of a vector error correction model (VECM) as
not all the variables used in the model were statio nary. The rest of the paper is organised
as follows, section 2 gives a brief review of the literature. A discussion of the empirical
methodology is carried out in section 3. Section 4 deals with the data description. An
analysis of the results is undertaken in section 5 while, section 6 delves into the scenario
analysis and section 7 concludes.
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