This paper is an empirical investigation into the effects of government spending on private investment from a neoclassical perspective. The central focus of the paper is on the question: does higher public capital accumulation "crowd out" private investment in plant and equipment? On neoclassical grounds, the answer to this question is seen to depend upon two fundamental, opposing forces. On the one hand, higher public investment raises the national rate of capital accumulation above the level chosen (in a presumed rational fashion) by private sector agents; thus, public capital spending may crowd out private expenditures on capital goods on an ex ante basis as individuals seek to reestablish an optimal intertemporal allocation of resources. On the other hand, public capital--particularly infrastructure capital such as highways, water systems, sewers, and airports--is likely to bear a complementary relationship with private capital in the private production technology. Thus, higher public investment may raise the marginal productivity of private capital and, thereby, "crowd in" private investment. Isolating these separate effects will allow: (1) a test of the appropriateness of the equilibrium approach to fiscal policy (the former effect); (2) information on the productivity of public capital (the latter effect); and (3) a resolution to the query of whether or not public capital spending can affect the national capital stock to a substantive degree. This paper is presented in the following sections: (I) Introduction; (II) A Neoclassical Analysis - sketches out the primary theoretical considerations; (III) Empirical Analysis - provides estimates of a parsimoniously specified model of investment, the rate of return to private capital, and public expenditure variables; and (IV) Public Investment, Private Investment, and the Rate of Return - illustrates the interactions captured by the estimated model with some fiscal policy simulations.

  • Corporate Authors:

    Federal Reserve Bank of Chicago

    P.O. Box 834
    Chicago, IL  United States  60690-0834
  • Authors:
    • Aschauer, D
  • Publication Date: 1989

Media Info

  • Features: Figures; References; Tables;
  • Pagination: 29 p.
  • Serial:

Subject/Index Terms

Filing Info

  • Accession Number: 00486133
  • Record Type: Publication
  • Report/Paper Numbers: SM-88-10
  • Files: TRIS
  • Created Date: Aug 31 1989 12:00AM