The effects of infrastructure and public investment on the elasticity of private investment: an empirical investigation for Brazil

FRAGA, JEFFERSON S.; FERREIRA-FILHO, HELDER LARA

doi:10.1590/0101-31572023-3383

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Articles • Brazil. J. Polit. Econ. 43 (1) • Jan-Mar 2023 • https://doi.org/10.1590/0101-31572023-3383 copy

The effects of infrastructure and public investment on the elasticity of private investment: an empirical investigation for Brazil^* * We thank Denise Sara Key for proofreading the English of this manuscript. Also, we thank Vitor Henrique B. Fabel for valuable comments.

Os efeitos da infraestrutura e do investimento público na elasticidade do investimento privado: uma investigação empírica para o Brasil

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

This study estimates the determinants of the elasticities of private investment and total investment for the Brazilian economy for the period between 1960 and 2013. It uses a Bayesian model averaging and weighted-average least-squares approach with a flexible accelerator model of investment equation and Kalman filtering techniques. We conclude that the aggregate infrastructure index (taken from the main component analysis) and public investment crowd-in private investment. The results indicate that private investment is constrained by the availability of bank credit. Furthermore, we find that infrastructure stock and public investment are two of the main determinants of the elasticities of private investment. This demonstrates that public investment, mainly in infrastructure, is of great importance in raising the sensitivity of private investment in the Brazilian economy.

KEYWORDS:
Infrastructure; private investment; elasticities

	Variable	Expected Sign	Data source
Real Private Investment	I	(+)	IMF (2015“IMF INVESTIMENT AND CAPITAL STOCK DATASET, 2015”. Estimating Public, Private Capital Stocks Estimating Public, Private Capital Stocks http://www.imfstatistics.org/imf/about.asp . Acesso em: 02 Jul.2021. http://www.imfstatistics.org/imf/about.a... )
General government investment	GI	(+/-)	IMF (2015“IMF INVESTIMENT AND CAPITAL STOCK DATASET, 2015”. Estimating Public, Private Capital Stocks Estimating Public, Private Capital Stocks http://www.imfstatistics.org/imf/about.asp . Acesso em: 02 Jul.2021. http://www.imfstatistics.org/imf/about.a... )
Aggregate infrastructure stock index	Z	(+)	Some sources³ 3 The Principal Component Analysis (PCA) sectors are: i) length of the train lines and length of the paved roads in kilometers, taken from Canning D. (1998), Federation International Roads (IRF) and the World Bank; ii) fixed telephone subscriptions and mobile phone subscriptions, by Canning D. (1998) and the World Bank; iii) generation of Gigawatt electrical capacity (GW) obtained in Canning D. (1998), World Bank and United Nations Statistics Division.
Real interest rate (Selic)	R	(-)	BCB (2020)⁴ 4 The first years of the series were represented by the commercial banks’ average annual lending rate. Data was also taken from the Central Bank of Brazil and deflated by the General Price Index (IGP-DI).
Real exchange rate	RER	(+/-)	BCB (2020)
Domestic credit to the private sector/GDP	CRED	(+)	World Bank Indicators
External debt stock (% of GNI)	EE	(-)	World Bank Indicators
Lagged private investments	I _t-1	(+)	-
Economic freedom index	FREE	(+)	Fraser Institute⁵ 5 Which consists of five components: i) Government size; ii) rule of law and protection of private property; iii) Currency strength; iv) Commercial freedom; v) Regulation of the economy. The better the economy is evaluated, the higher the index value, which ranges from 0 to 10, data retrieved from Fraser Institute.
Indicator of Economic Instability	INST	(-)	FGV (2022)⁶ 6 frm01 where P is the inflation rate (EM %)/100, measured by the variation of the General Price Index - Internal Availability (IGP-DI), released by Fundação Getulio Vargas (FGV).
Capacity Utilization Level (%)	UTCAP	(+)	FGV (2022)⁷ 7 Average of the quarterly observations of the Installed Capacity Utilization - General series. It is fundamentally based on the industrial sector.
The expected GDP	Y ^e	(+)
GDP	Y	(+)

	BMA		WALS (q=1)		WALS (q=0.5)		WALS (q=0.2)		VEC
	Coef.	t	Coef.	t	Coef.	t	Coef.	t	Coef.	z
cons	1.662	3.69*	1.706	4.40*	2.07a	6.46*	2.132a	7.14*	-4.249	-
Y ^e	0.816	0.96*	0.788	0.90	0.406a	0.48	0.342a	0.40	0.280	-4.02b
Z	0.088	3.13*	0.091	3.52*	0.106a	5.04*	0.117a	5.60*	0.187	-8.04b
R	-0.053	-3.68*	-0.054	-4.35*	-0.065a	-5.40*	-0.069a	-5.53*	-0.231	10.04b
CRED	0.107	2.90*	0.106	2.99*	0.128a	3.65*	0.131a	3.65*	0.523	-6.46b
FREE	-0.035a	-1.10*	-0.040a	-1.78*	-0.059a	-2.59*	-0.063a	-2.80*	-0.234	4.24b
I _{t - 1}	0.631	7.72*	0.626	8.38*	0.553	9.00*	0.543a	9.46*	0.945	-2.60b

Equation 3
		BMA			WALS (q=1)			WALS (q=0.5)			WALS (q=0.2)
	Coef.	Std. Err	t	Coef.	Std. Err	t	Coef.	Std. Err	t	Coef.	Std. Err	t
cons	1.890	0.444	4.26*	1.823	0.464	3.93*	1.996a	0.377	5.29*	2.023a	0.349	5.79*
Y ^e	0.851	0.998	0.85*	0.973	0.906	1.07*	0.866a	0.842	1.03*	1.069a	0.828	1.29*
Z	0.102	0.028	3.65*	0.105	0.026	3.93*	0.109a	0.019	5.51*	0.113a	0.017	6.51*
R	-0.061	0.023	-2.56*	-0.057	0.022	-2.61*	-0.058a	0.017	-3.37*	-0.057a	0.015	-3.67*
FREE	-0.058	0.025	-2.31*	-0.064	0.026	-2.39*	-0.049a	0.026	-1.87*	-0.049a	0.027	-1.77*
INST	0.007	0.027	0.29*	0.007	0.027	0.27	0.000a	0.023	0.00	-0.000a	0.022	-0.00
CRED	0.089a	0.048	1.84*	0.073a	0.033	2.16*	0.111a	0.035	3.12*	0.108a	0.035	3.02*
REE	0.004a	0.024	0.17	0.027a	0.055	0.48	0.010a	0.061	0.17	0.005a	0.063	0.09
I _{t - 1}	0.606	0.081	7.45*	0.609	0.079	7.69*	0.559a	0.059	9.40*	0.557a	0.052	10.56*
Equation 4
		BMA			WALS (q=1)			WALS (q=0.5)			WALS (q=0.2)
	Coef.	Std. Err	t	Coef.	Std. Err	t	Coef.	Std. Err	t	Coef.	Std. Err	t
cons	-12.363	1.547	-7.99*	-10.924	2.300	-4.75*	-11.117a	2.187	-5.08*	-11.292a	2.177	-5.19*
Y	0.598	0.052	11.40*	0.557	0.054	10.22*	0.556a	0.052	10.64*	0.566a	0.051	11.03*
GI	0.105	0.064	1.64*	0.119	0.026	1.91*	0.089a	0.063	1.41*	0.082a	0.063	1.30*
R	-0.089	0.020	-4.36*	-0.109	0.023	-4.71*	-0.110a	0.019	-5.54*	-0.109a	0.018	-6.00*
CRED	0.086	0.038	2.23*	0.102	0.041	2.47*	0.113a	0.041	2.71*	0.115a	0.043	2.64*
REE	0.158	0.078	2.02*	0.141	0.079	1.78*	0.221a	0.082	2.68*	0.223a	0.083	2.67*
FREE	-0.126a	0.028	-4.39*	-0.095a	0.028	-3.38*	-0.114a	0.029	-3.83*	-0.120a	0.030	-3.99*
INST	0.016a	0.029	0.55*	0.049a	0.030	1.62*	0.044a	0.028	1.57*	0.041a	0.028	1.47*
EE	0.006a	0.016	0.40	0.025a	0.020	1.22*	0.035a	0.021	1.66*	0.032a	0.020	1.56*
UTCAP	-0.010a	0.130	-0.08	-0.097a	0.350	-0.28	-0.115a	0.353	-0.33	-0.132a	0.363	-0.37

	Avg	Min	Max	Median	StdDev
Y ^e	0.809	0.280	1.069	0.858	0.275
Z	0.113	0.088	0.187	0.106	0.029
GI	0.098	0.082	0.119	0.097	0.016
R	-0.086	-0.231	-0.053	-0.065	0.048
CRED	0.137	0.073	0.523	0.108	0.116
I _{t - 1}	0.625	0.543	0.945	0.606	0.124
_Y	0.569	0.556	0.598	0.561	0.019

	BMA		WALS (q=1)		WALS (q=0.5)		WALS (q=0.2)		VEC
	Coef.	t	Coef.	t	Coef.	t	Coef.	t	Coef.	z
cons	5.020	23.50*	4.938	23.77*	4.966a	23.52*	4.987a	23.60*	4.182	15.10b
Y ^e	0.124	2.67*	0.122	2.65*	0.113a	2.45*	0.118a	2.54*	0.229	-2.76b
Z	0.288	18.11*	0.283	18.22*	0.280a	17.73*	0.283a	17.91*	0.177	-6.38b
R	-0.086	-5.71*	-0.083	-5.59*	-0.087a	-5.78*	-0.087a	-5.82*	-0.306	11.13b
CRED	0.113	2.10*	0.124	2.33*	0.125a	2.32*	0.122a	2.25*	0.634	-6.56b
FREE	-0.148a	-3.84*	-0.126a	-3.41*	-0.141a	-3.78*	-0.145a	-3.89*	-0.280	4.25b

Equation 9
	BMA		WALS (q=1)		WALS (q=0.5)		WALS (q=0.2)		VEC
	Coef.	t	Coef.	t	Coef.	t	Coef.	t	Coef.	z
cons	5.145	10.84*	5.261	11.63*	5.285a	11.55*	5.358a	11.49*	2.266	-
Y ^e	0.130	2.64*	0.130	2.74*	0.107a	2.23*	0.105a	2.15*	0.232	-3.84b
Z	0.288	17.29*	0.284	18.09*	0.283a	17.65*	0.287a	-4.10*	0.216	-11.02b
R	-0.114	-3.20*	-0.132	-4.60*	-0.126a	-4.09*	-0.129a	-4.10*	-0.184	4.80b
CRED	0.112	2.02*	0.123	2.33*	0.105a	1.95*	0.099a	1.83*	0.461	-6.89b
REE	-0.009	-0.09	-0.042	-0.42	-0.036a	-0.36	-0.046a	-0.45	0.488	-3.84b
FREE	-0.146a	-3.21*	-0.120a	-3.19*	-0.120a	-2.94*	-0.118a	-2.81*	-0.299	5.95b
INST	0.047a	0.85	0.094a	2.04*	0.075a	1.63*	0.079a	1.69*	-0.142	2.54b
Equation 10
	BMA		WALS (q=1)		WALS (q=0.5)		WALS (q=0.2)		VEC
	Coef.	t	Coef.	t	Coef.	t	Coef.	t	Coef.	z
cons	-14.098	-3.81*	-14.525	-4.44*	-14.799a	-4.69*	-15.318a	-4.96*	8.060	-
Y	0.624	6.95*	0.626	7.79*	0.581a	7.11*	0.590a	7.28*	0.255	-4.07b
GI	0.166	1.69*	0.146	1.62*	0.128a	1.35*	0.120a	1.24*	0.711	-9.01b
R	-0.024	-0.64	-0.048	-1.32*	-0.053a	-1.74*	-0.052a	-2.00*	-0.026	0.52
CRED	-0.030	-0.44	-0.049	-0.79	-0.044a	-0.71	-0.050a	-0.79	0.568	-8.37b
REE	-0.064	-0.43	0.001	0.01	0.137a	1.37*	0.143a	1.41*	-0.418	3.08b
FREE	-0.041a	-0.82	-0.054a	-1.62*	-0.053a	-1.28*	-0.053a	-1.22*	-0.153	3.44b
INST	0.020a	0.46	0.060a	1.31*	0.071a	1.72*	0.074a	1.95*	-0.371	6.00b
EE	0.027a	0.54	0.057a	1.24*	0.109a	2.27*	0.114a	2.39*	-0.411	10.96b
UTCAP	0.395a	0.71	0.439a	0.96	0.622a	1.33*	0.683a	1.46*	-0.043	5.27b

	Avg	Min	Max	Median	StdDev
Y ^e	0.141	0.105	0.232	0.123	0.047
Z	0.266	0.177	0.288	0.283	0.038
GI	0.254	0.120	0.711	0.146	0.255
R	-0.114	-0.306	-0.048	-0.087	0.069
CRED	0.235	0.099	0.634	0.123	0.208
Y	0.535	0.255	0.626	0.590	0.157

Variables	Chi2	p-probability
p <- z	82.305	0.000
z <- p	10.374	0.110
p <- GI	95.389	0.000
GI <- p	20.155	0.003

Level Variables				Variables in First Difference
Series	ADF	PP	Integration Order	Series	ADF	PP	Integration Order
I	-1.15	-1.13	I (0)	I	-5.75***	-5.74***	I (1)
Y ^e	-2.43	-2.38	I (0)	Y ^e	-8.23***	-8.24***	I (1)
Z	-2.21	-1.99	I (0)	Z	-9.36***	-9.37***	I (1)
R	-3.65***	-3.14***	I (0)	R	-5.65***	-5.66***	I (1)
FREE	-1.76	-1.78	I (0)	FREE	-7.07***	-7.07***	I (1)
INST	-2.50	-2.65*	I (0)	INST	-7.60***	-7.60***	I (1)
I _{t - 1}	-1.45	-1.32	I (0)	I _{t - 1}	-5.40***	-5.40***	I (1)
CRED	-1.87	-1.82	I (0)	CRED	-4.96***	-6.22***	I (1)
REE	-2.55	-2.68*	I (0)	REE	-6.24***	-6.25***	I (1)
GI	-1.45	-1.53	I (0)	GI	-8.27***	-8.29***	I (1)
EE	-3.13**	-6.94***	I (0)	EE	-4.71***	-6.94***	I (1)
UTCAP	-2.30	-2.36	I (0)	UTCAP	-7.24**	-7.24**	I (1)
p _t	-4.33***	-0.93	I (0)	p _t	-6.88***	-2.62*	I (1)

Lag	Logl	LR	FPE	AIC	SC	HQ
0	-205.105		0.000	8.616	8.704	8.848
1	48.008	506.23	0.000	-0.245	0.369*	1.376*
2	85.445	74.875	0.000*	-0.303	0.838	2.707
3	121.193	71.494	0.000	-0.293	1.376	4.107
4	172.074	101.76*	0.000	-0.900*	1.296	4.890

Cointegration Rank Test
H_0	H_1			Critical Value	Critical Value
Rank=r	Rank>r	Eigenvalue	Trace	5%	1%
0	0	-	124.9419	94.15	103.18
1	1	0.699	63.6603***	68.52	76.07

Lag	Logl	LR	FPE	AIC	SC	HQ
0	-374.142		2.654	15.165	15.238	15.356
1	-72.988	602.31	0.000	4.119	4.556	5.266*
2	-40.524	64.927	0.000*	3.820	4.621	5.924
3	-4.447	72.154	0.000	3.377	3.813*	6.437
4	47.894	104.68*	0.000	2.284*	3.542	6.299

Cointegration Rank Test
H_0	H_1			Critical Value	Critical Value
Rank=r	Rank>r	Eigenvalue	Trace	5%	1%
0	0	-	74.622	47.21	54.46
1	1	0.621	24.070***	29.68	35.65

Lag	Logl	LR	FPE	AIC	SC	HQ
0	100.842		0.000	-4.034	-4.005	-3.957
1	145.532	89.381	0.000	-5.695	-5.607	-5.463
2	206.144	121.22	1.1e-06	-8.005	-7.859	-7.619
3	264.515	116.74	1.2e-07	-10.225	-10.02	-9.684
4	297.579	66.128*	3.8e-08*	-11.411*	-11.147*	-10.716*

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The effects of infrastructure and public investment on the elasticity of private investment: an empirical investigation for Brazil* * We thank Denise Sara Key for proofreading the English of this manuscript. Also, we thank Vitor Henrique B. Fabel for valuable comments.

Os efeitos da infraestrutura e do investimento público na elasticidade do investimento privado: uma investigação empírica para o Brasil

ABSTRACT

The effects of infrastructure and public investment on the elasticity of private investment: an empirical investigation for Brazil^* * We thank Denise Sara Key for proofreading the English of this manuscript. Also, we thank Vitor Henrique B. Fabel for valuable comments.