Abstract
Aggregate domestic investment in People’s Republic of China is empirically modeled using quarterly data for the period 1994-2001. The total investment is disaggregated into two parts: business sector investment and government direct investment. The dynamic specification approach is adopted and the equilibrium-correction model form is used. Business sector investment is found to follow closely the standard capital input demand theory in the long run, but to respond positively to changes in government direct investment in the short run. It is found that government investment is driven, additionally to the revenue constraint, by the policy targets of maintaining steady economic growth and reducing unemployment. The resulting investment equations provide a sound model base for policy simulation and forecasting.
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