An Empirical Analysis of The Effects of Government Spending on Capital Investment: Evidence from O.E.C.D. Countries.

This paper focuses on the possible “direct” effect in increased government size on fixed capital formation. That is, we hypothesize that as government increases its consumption as percentage of GDP, investors modify their investment plans accordingly. It is our contention that the direct effect of government size on fixed capital investment manifest themselves through a downward shift in the investment schedule. To test this hypothesis, we estimate an aggregate investment function for eighteen O.E.C.D. countries for the period 1960-1994. Our findings suggest a negative relationship between government size and fixed capital investment. [ E22, E62]