The Macroeconomic Effect of Public Investment

Abstract

This paper establishes a VAR model and VEC model using the data of Chinese public investment, GDP, private investment and employment from 1997 to 2013 aiming to analyze the influence of Chinese public investment on GDP, private investment and employment through ADF unit root test, Granger causality test, Johansen co-integration test, impulse response function, variance decomposition and other empirical methods. Results show that there is a stable equilibrium relationship among Chinese public investment, GDP, private investment and employment in the long term; Public investment has a positive effect on GDP in the short term, which is not obvious even negative in the long term though; Public investment has a crowding out effect on private investment in the short term, while has a positive impact instead in the long term; The positive influence that public investment has on employment is very weak both in the short term and long term. For the stable and healthy development of social economy, the government should improve the efficiency of public investment by means of controlling the scale, optimizing the structure and strengthening the supervision of public investment; A series of policies should be introduced as well to encourage private investment at the same time.