Private versus Public Capital in Italy: An Empirical Analysis

In recent years, European countries experienced severe fiscal policy measures which hindered government spending, in compliance with the process of budgetary consolidation and the development of fiscal rules at EU level. Italy was no exception. Since the whole area is also facing low rates of economic growth it is widely recognized that a sustained growth in spending would improve the EU’s growth potential as well. As a consequence, most European countries are developing specific provisions for public investment within the EU’s framework for budgetary surveillance. The relevance of public infrastructure spending as a strategy to promote economic development has been well acknowledged among economists through times although there is not general consensus about whether and how public capital affects the economy: most economists agree on the positive impact of public investment on output and productivity, but results are not very strong and depend quite crucially on the analytical methodologies employed. In general, there is not a clear evidence in favour of public rather than private capital accumulation. Our research addresses such issues for the Italian case. We aim at investigating the role played by public and private capital in the Italian economy over the last two decades by means of a cointegrated VAR approach involving a common trend analysis. Our findings tend to reduce emphasis about the positive role of public capital; following a neoclassical growth model in a learning by doing framework, our empirical analysis highlights the strength of private capital in spreading out technical progress and fostering the growth process. Public capital is merely adjusted in order to follow such a development process by maintaining a constant ratio to private capital.