The Crowding-out Effect Of Government Investment Towards Private Investment

The problem that the government investment crowd out the private investment has been a hot term in Chinese macro-economic field since 1998 when the government made the expansionary fiscal policy put into practice. The issue of crowding-out effect is very important for it determines the effects of expansionary fiscal policy. Furthermore, it also imposes great affects on the private economic development and the long-term economic development. After the global financial crisis in 2008, the Chinese government started the financial investment of 4 trillion in order to inhibit the economic recession. How the government deals with such a huge funds as well as the effect that government investment brought to the private investment become a hot discussion topic in domestic academic fields. Although the relationship between government investment and private investment is studied by many scholars, the conclusion is different from one another. But previous studies primarily focused on the crowding-out effect of Keynesian theory and they attach few to the special conditions of Chinese economic. The special conditions of Chinese economic conclude:the proportion of China's state-owned economy is much higher than Western countries'; the fiscal data can't reflect all the government's economic behavior; the required mechanism of crowding-out effect of Keynesian theory doesn't exist in china, many institutional reasons such as prohibit private investment in certain fields; administrative examination and approval, the government capital competing with private capital for some projects also crowd out private investment greatly. Based on the analysis above, the government investment that I will redefine will be divided into investment in the public domain and investment in the competitive field, and I will test the relationship between the private investment and the two different government investment respectively in order to offer scientific proposition to the government's policy-making.The paper is organized as follows:Section 1 is the introduction which contains the research background, literature reviews, methodology of the research and the points of innovation. Section 2 definite the conception of the government investment, crowd-in and crowd-out effect which mainly conclude the definition of government investment and private investment, a simple introduction to the traditional crowding-out effect theory and the analysis of particular crowding-out effect under the Chinese special economic situation. Section 3 contains the theoretical analysis of the crowding out effect. After the introduction of the principle of the Keynesian crowding-out effect, the paper analyze the traditional crowding-out effect's applicability to china through the analysis of the interest rate mechanism, interest rates, money supply and so on. Then the paper outlines the crowding-out effect theoretical model creatively which the government involves in the production area and is suitable to china. Section 4 is the empirical Analysis of the crowding-out effect. After the data description, the paper makes an econometric analysis to the relationship between the classified government investment and private investment using time-varying parameter model and makes a corresponding interpretation. Finally section 5 conclusions and policy recommendations.The main contribution of this paper is that the traditional crowding out effect of Keynesian theory does not apply in China and the real reason of the crowding-out effect are the institutional factors in china's transition economic period, such as government investment in the competitive field, confining the private investment in certain fields, etc, which is supported by empirical research.