Public and private investment: Are there causal linkages?

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This paper examines the causal linkage between private investment and government provision of public capital and government investment spending. The influence of the provision of public infrastructure on private investment activity is examined by including public sector investment spending and public capital stock along with the variables specified in the major theoretical private investment models. The multivariate Granger-Causality testing procedure combined with the Akaike's Final Prediction Error (FPE) criterion is employed on annual data over the period 1954–1989. The results indicate that profits, the rate of return to capital and the tax-adjusted measre of Tobin's q “Granger cause” private equipment investment. Tobin's q also exhibits a significant positive effect on public investment. The results indicate the existence of feedback effects between public and private investment.