Balanced growth and public capital: an empirical analysis with I(2)-trends in capital stock data.

Abstract The contribution of public capital to economic growth in Belgium is analysed in a cointegrated VAR model. Two methodological problems are addressed. First, as technology is unobservable, the neoclassical growth model is used to identify it as a common stochastic trend. Second, apparent I(2) behaviour of capital stocks disables cointegration analysis to pick up a standard production function specification as an equilibrium relation. Therefore, a steady state relation between output, private and public investment is estimated instead, with the I(2) trends in capital stock series capturing ‘medium-term’ adjustment. Public investment is found to have a positive impact on economic growth.

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