Shifts in balanced growth and public capital: an empirical analysis for Belgium

In the large literature analysing the contribution of public capital formation to productivity growth, the stance of technology has been unremittingly ignored. However, technological progress is one of the most important determinants of long-run growth in many macroeconomic variables. Output elasticities calculated from long-run cointegrating estimates omitting technology are therefore very likely to be subject to an important omitted variable bias. In a recent paper, Crowder and Himarios (1997) propose to identify technological progress in the data based on the neo-classical growth model’s result that the long-run behaviour of the economy is uniquely determined by technology. Once this common long-run growth component is extracted from the data, the production function can be estimated as a ‘period-by-period’ constraint. In this paper, this approach is extended to allow for a permanent shift in the balanced growth path, implied by the structural reduction of public capital investment. The methodology is applied to Belgian data for the period 1953-96.