How does income distribution affect the impact of public investment on private investment? Empirical evidence from Brazil

Purpose This article aims to investigate whether the effect of public investment on private investment differs in regimes of relatively high and low-income inequality in Brazil from 1996 to 2022. Design/methodology/approach The linear vector autoregressive (VAR) model was applied to estimate the effect of public investment on private investment. To investigate the role of income distribution in this result, we employed a threshold vector autoregressive (TVAR) model. Findings The results reveal that the crowding-in effect only occurs in the relatively low-income inequality regime: a 10% increase in public investment results in a 0.8% and 3.4% increase in private investment after one and four quarters, respectively. Conversely, the response is not statistically different from zero in the relatively high-inequality scenario. Thus, from a macroeconomic standpoint, diminishing inequality can enhance the responsiveness of private investment to public investment. Originality/value Our results underscore the substantial macroeconomic potential of policies designed to mitigate inequalities. These policies play a pivotal role in advancing social equity and propelling more inclusive economic growth.