Does government expenditure crowds out the private domestic investment? Empirical evidence of Indonesia

The objective of this study is to examine the effect of government expenditure on private domestic investment in Indonesia. Based on the previous studies, there is no clear justification whether government expenditure is crowding in or crowding out the private investment. Using quarterly time series data during period 1985 to 2012, the empirical results show that government expenditure (total) is crowding out private domestic investment in both short term and long term. Specifically, government expenditure for public service is crowding out the private investment in both short term and long term. Unlike public services, the economic expenditure is crowding in the private investment in the long term. Moreover, health expenditure is crowding out the private investment in the short term while education expenditure is crowding out in the short term and crowding in in the long term.