The Relationship Between Public and Private Capital in Emerging Europe

The aim of this paper to evaluate the relationship between public and private capital formation in 16 economies from Central Eastern and South Eastern Europe by applying panel-cointegration methods to 2000–2017 data. We find a positive public-private capital formation nexus both in the short and the long-run, with pro-cyclicality of private capital formation and negative relevance of the user costs of capital. The results imply that expansionary public investment policy may be effective in boosting private investment both in the short and the long-run, if fit into a financially sustainable framework that limits negative impact of the user cost of capital.