Public-private investment substitutability-complementarity, taxation, and bank competition

ECONOMIA PUBBLICA, 2019, vol. 2019/3, issue 3, 41-61

Abstract: This article examines how the fact that commercial banks finance both private investment through bank lending and public investment through government bond absorption in the bond markets, affects the substitutability/complementarity of the two types of investment. It is found that their relationship depends critically on tax policy; under imperfect bank competition, the growth rate of government expenditure and the issuance of bonds should depend inter alia on the success of private sector ventures as well, if public and private investment are to be complementary. Given some tax rate consistent with complementarity, when the credit extended to the public sector is suboptimal and more public projects need to be financed, seigniorage issuance should be adopted as a means of finance.

JEL-codes: E63 H21 H50 (search for similar items in EconPapers)
Date: 2019
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