The Long-run Effects of Government Expenditure on Private Investment in Canada: An Empirical Investigation

The objective of this study is to investigate the long-run effects of various forms of government expenditures on gross private investment in Canada during the period 1961 to 2000. To this end, the effects of six categories of government expenditures are examined within the cointegration and error-correction framework. The empirical results show that government expenditure on education and health has positive (crowding-in) effects whereas government expenditures on capital and infrastructure and on debt charges have negative (crowding-out) effects on private investment. The other expenditure categories, including government consumption expenditure, expenditure on protection of persons and property; and expenditure on social services have no statistically significant long-run effects on private investment.