The Positive Effect of Public Investment on Potential Growth

An estimated baseline convergence model capturing the long-term effect of human capital and physical investment on potential output for a panel of OECD countries is augmented with public investment and its components. The estimations suggest that public investment has a positive effect on long-term growth and on labour productivity. Public investment can also increase the speed of convergence of catching-up countries. Public investment is more beneficial in some areas than others. This is particularly the case of public investment in health and in research and development. There is also evidence that growth gains from increasing public investment may decline at a high level of the public capital stock due to decreasing returns