—This paper examines relationship between
government expenditure and private investment in the case of
small open economies. Governments could promote private
investment increasing government expenditure, but increase of
government expenditure can both crowd out and crowd in
private investment. In order to assess relationship between
government expenditure and private investment in this
research, cross-correlations and Granger causality tests are
applied using data of Bulgaria, Estonia, Latvia, Lithuania and
Slovenia during 1996 – 2012. The research results show that
impact of government expenditure increase on private
investment is very weak, but negative impact of government
expenditure increase on private investment dominates, except
in the case of Bulgaria; whereas the impact of private
investment increase on government expenditure is very
different in analyzed countries.
—Fiscal policy, government expenditure, private
investment, small open economy.
Lina Sinevičienė is with the Faculty of Economics and Management,
Kaunas University of Technology, K. Donelaičio str. 73, LT-44029, Kaunas,
Lithuania (e-mail: firstname.lastname@example.org).
Cite: Lina Sinevičienė, "Testing the Relationship between Government
Expenditure and Private Investment: The Case of Small
Open Economies," Journal of Economics, Business and Management vol. 3, no. 6, pp.628-632, 2015.