Capital Spillovers and Growth Revisited: a long-run and dynamic structural analysis

Abstract

We extend the deterministic growth model of Glomm and Ravikumar (1994) to a stochastic endogenous growth model which nests both exogenous and endogenous growth factors. By introducing simple shocks to production technology, private capital and public capital investment, we can derive testable time series properties of the analytical model. We find evidence of co-integration between per capita output, per capita private capital and public capital. A nested test of the strictly endogenous growth model is rejected statistically. We find that growth is exogenous even in the presence of significant and sizeable public capital spillover effects. Our long-run elasticity estimates help to inform the short-run dynamic transitions of the model. In particular, we are able to structurally rationalise other empirical findings of bi-directional short-run effects between public and private capital and also aggregate output.