The impact of Mexico’s foreign public debt over the country’s private investment: A co-integrating analysis

Abstract

Evidence suggests that the implementation of public policy crowds out private expenditure. It is argued, for example, that public spending inhibits private investment. However, formal evidence indicates that this crowding out effect does not always hold. In particular, it has been shown that it is possible to find a complementary relation between public spending and real variables of the private sector such as consumption and investment in the long run. In this document we analyze the short run and long run stochastic dynamics of private investment and foreign public debt in Mexico, a variable that has been scarcely used as a proxy for public spending. With the estimation of an error correction model we derive results that are consistent with what is found in the literature. That is, we identify that, while foreign public debt exhibits a negative relation with private investment in the short run, the relationship becomes positive for longer horizons.

Keywords

• deuda externa pública
• inversión privada
• gasto público.