Public investment and economic growth

Abstract

This article uses an extension of Mankiw, Romer and Weil's augmented Solow-Swan growth model to examine whether public investment has a distinct role as a determinant of economic growth. It considers both the predictions of the model in steady state and in transition to steady state. For the steady state model, there is no significant effect from public investment on the level of output per worker. Using standard ordinary least squares (OLS) methods for the transition model, it observes a significant contribution to economic growth from public investment. When instrumental variables methods are used, however, the associated standard errors are much larger and the contribution of public investment is statistically insignificant.