Crowding-in or Crowding-out? Modelling the Relationship between Public and Private Fixed Capital Formation Using Co-integration Analysis: The Case of Pakistan 1964-2000

This paper uses the Co-integrating VAR’s [Johansen (1988); Ericsson, et al. (1998)] to examine the relationship between economic growth, public investment, and private investment in the presence of unit roots. Exogeneity is not implicitly assumed but explicitly tested for, and evidence of co-integration and feedback between public and private investment leads to a model in the form of a parsimonious VAR. The analysis is conducted using 37 years of annual data for Pakistan. The analysis suggests that public investment has a positive impact on private investment, and that economic growth drives both private and public investment as predicted by the accelerator-based models.