Public Expenditure And Private Investment: A Study of Three OECD Countries

This paper examines the relationship between private investment and government spending in Australia, Britain and the United States. Since all time series data are stationary in first differences and cointegrated, these series are represented by an error correction model. Variance decomposition and impulse response functions are employed to investigate the effects of various types of government spending. Generally the empirical results provide support for the positive effect of defence spending in the United States and the negative effect of government consumption and investment spending in Britain.