Is Public Capital Productive in Europe?

Abstract

This paper addresses the issue of whether and by how much public investment or publiccapital can enhance economic performance. In comparison with the literature on the subject,we apply many different methodologies to answer these questions. A VAR model (for France,Italy, Germany, the UK and the USA), a panel composed of 6 European countries (Austria,Belgium, France, Germany, Italy and the Netherlands) and a regional panel (French regions)are therefore estimated. Public investment is shown to be a significant determinant of output; this is also true for public capital but to a lesser extent than public investment with a VAR methodology. The size of the estimated coefficient is also more realistic than those obtained in the literature. This empirical result confirms that the focus of some economists onsafeguarding the level of public investment is not misplaced. The debate on the introduction of a "golden rule of public finance" in EMU is legitimate.