Crowding-out (or -in) effect in transition economies: Kyrgyzstan case

Abstract

Purpose The crowding-out and crowding-in effects have been at the core of arguments among economists regarding the influence of government spending on private investment. This study aims to examine the crowding-out (or -in) effect of public spending on private investment in the transition economy of Kyrgyzstan. Design/methodology/approach The empirical model is an autoregressive distributed lag (ARDL) and the vector autoregression approach (VAR). Monthly data from 2005 to 2013 of the private investment, government expenditures, remittances from abroad and broad money data were used in the empirical analysis. Findings The authors found that an increase in government purchases leads to rise in private investment. More precisely, the public spending crowds-in private investment at the speed with 2.06 months. On the other hand, despite the fact that remittances to GDP ratio has reached to almost 30 per cent, there is no any statistically significant effect between these variables. On the contrary, it was revealed that the broad money has statistically significant, affirmative effect on private investment. Furthermore, findings of the VAR model support the results of ARDL. The variance decomposition demonstrates that private investment shock accounts for 58.16 per cent in government expenditures, 11 per cent in broad money and 5 per cent in remittances. Originality/value The results of the study allow policymakers to demonstrate that the growth of national economy of the Kyrgyz Republic may be encouraged by expanding public investment with external source assistance such as grants and international loans. Accordingly, efficient use of those external funds is one of the suggested ways for economic development. Nevertheless, expansionary monetary and fiscal policy may be beneficial for economic growth in Kyrgyzstan.