And yet they Co-move! Public capital and productivity in OECD

In this paper, we add to the debate on the public capital–productivity link by applying very recent developments in the panel time series literature that take into account cross sectional correlation in non-stationary panels. In particular, we evaluate the productive effect of public capital by estimating various production functions on a panel of 21 OECD countries over the period 1975–2002. Our results suggest that public capital has a positive long run impact on output, with elasticities that range between 0.05 and 0.15, depending on model specification. These findings are robust to the existence of spillover effects from public capital investments in other countries and to the inclusion of other productivity determinants, like human capital, the stock of patents and R&D capital. Finally, we do not find any important effect of public capital on GDP in the short run: this suggests that public infrastructure investments might not be a powerful countercyclical policy instrument.