Title: Do budget deficits crowd out private investment? An analysis of the South African economy

Authors: Rumbidzai Aime Biza; Forget Mingiri Kapingura; Asrat Tsegaye

Addresses: British High Commission, 255 Hill Street, Arcadia Pretoria, South Africa ' Department of Economics, University of Fort Hare, East London Campus, East London, South Africa ' Department of Economics, University of Fort Hare, East London Campus, East London, South Africa

Abstract: South Africa has been experiencing unprecedented budget deficits since the 1960s, in light of this, the study investigates whether budget deficits crowd out or crowd in private investment in South Africa, using quarterly data covering the period 1994 to 2009. An empirical model linking private investment to its theoretical variables is specified and used to assess the quantitative effects of budget deficits on private investment. The study augments the cointegration and vector auto-regression (VAR) analysis with impulse response and variance decomposition analyses to provide robust long run and short run dynamic effects on private investment. The empirical results revealed that there is a long-term relationship between private investment and its determinants specified in the model. This implies that budget deficits significantly crowds out private investment in the long-run. These results corroborate the theoretical predictions and are also supported by previous studies.

Keywords: economic growth; budget deficits; South Africa; cointegration; VECM; private investment; vector auto-regression; VAR; impulse response; variance decomposition.

DOI: 10.1504/IJEPEE.2015.068248

International Journal of Economic Policy in Emerging Economies, 2015 Vol.8 No.1, pp.52 - 76

Available online: 16 Mar 2015 *

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