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In this study, we test the effect of public investment on private sector investment for Turkey for the period 1980-2014. There can be three different types of relationship between them. Public investment can have crowding in effect on private sector investment. That is, an increase in public investments creates same way change in private sector investments. Public investment can have crowding out effect on private sector investment. In other words, an increase in public investments decreases private sector investments Public investment can have no effect on private sector investment. We first test the existence of the relationship between them by using recently introduced unit root and cointegration tests. We test the stationarity of the variables by using Kapetanios (2005) unit root test and test the long run relationship by employing Maki (2009) cointegration test. Both of the tests allow multiple structural breaks which determined endogenously. Since we find the long run relationship between public and private sector investments we examine the type of the effect using FMOLS cointegrating model which supports evidence for the crowding-in effect.
Keywords: Crowding Out Effect, Cointegration, Structural Breaks
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