The Impact of Public Investment on Private Investment in Jordan

This study attempts to investigate the causal relationship between government investment and private investment in Jordan over the period 1976-2004. The central question of this study is whether government investment plays a positive effect (complementary hypothesis) or a negative effect (the substitutability hypothesis) on private investment in Jordan. To achieve it objectives, the study uses the modern technique Vector Error Correction Model (VECM) as its methodology. The study uses the Johansen-Juselius (1990) cointegration analysis of a multivariate system of equations to estimate the long run relationship between government investment and private investment. To determine the order of integration of the variable series, the study employs the Augmented Dickey-Fuller (ADF) unit root test. The statistical tests reveal that all time series data are nonstationary in their levels and they become stationary after differencing, i.e., they are integrated of order one I (1). The Johansen-Juselius cointegration test shows that the series are cointegrated, and then, the study employs the VECM model. Moreover, the study applies the impulse response functions (IRF) and variance decomposition (VDC) to investigate the effect of government investment shocks on private investment. The empirical findings support the complementarity hypothesis between government investment and private investment, and that, government investment tends to crowd-in private investment in Jordan. Thus, the government investment activities have a positive effect on private investment and the economic growth in Jordan.