Abstract
As the most influential emerging and developing country in Asia, China has attached great importance to the construction of infrastructural facilities, laying stress on its pivotal role in sustainable growth. Recently, however, a pessimistic mood about the term “consumption downgrade” continues to emerge, ascribing the dip in people’s disposable income to real estate bubbles stemming from too much government infrastructure spending. This paper collects empirical evidence, develops a Dynamic Stochastic General Equilibrium (DSGE) framework, regards Productive Government Expenditure (PGE) as a critical endogenous variable, and investigates thoroughly its overall effects on key indicators concerning economic growth and sustainable development. Results show that household consumption indeed responds directly and negatively confronting a sudden increase of public infrastructure investment in China, yet aggregate output is instead boosted. On top of that, productive capacity does not present a supposed reduction, but a promotion under the PGE shock. These findings indicate that so-called “consumption downgrade” delivers the wrong message of weak productivity; capacity utilization is in essence improved by vigorous government support for infrastructure construction, which ultimately benefits continuously-stable social sustainability in the long term.
Highlights
In light of the unprecedented rapidity and size of economic growth, China has long been praised for top priority in public investment on infrastructure, aiming at promoting social welfare through a series of positive measures like the China Railway High-speed (CRH), Three Gorges Dam, Fiber-To-The-Home (FTTH), and so on
By fitting their typical characteristics into an extended Dynamic Stochastic General Equilibrium (DSGE) model, we extend the applicability of this model to institutional design aiming at facilitating healthy, harmonious, and sustained development
As an early work laying stress on the dynamic effect of public investment by means of a two-sector Dynamic Stochastic General Equilibrium (DSGE) model, the work in [20] placed micro foundations supporting that a flexible transportation system and advanced municipal facilities motivate private sectors to promote productivity and achieve welfare improving
Summary
In light of the unprecedented rapidity and size of economic growth, China has long been praised for top priority in public investment on infrastructure, aiming at promoting social welfare through a series of positive measures like the China Railway High-speed (CRH), Three Gorges Dam, Fiber-To-The-Home (FTTH), and so on. Just as the wide criticisms on the large-scale fiscal stimulus after the 2008 global financial crisis, public infrastructure investment and all other well-intended policies might run counter to the government’s desire: The liberalized Chinese financial system cultivates incentives for hiding default risks, which leads the financial assistance to flow into high-stake trade markets rather than into the real economy [2] At another level, as is strongly appealed and advocated by scholars and politicians, public infrastructure investment plays a pivotal role in improving people’s living standards, realizing free education, and providing affordable healthcare. This paper is instructive for posterior scholars who are curious and keen to draw on the experience of the “China miracle” and helps them delve into the desirable policy instruments applicable to developing economies that share the same traits as China By fitting their typical characteristics into an extended Dynamic Stochastic General Equilibrium (DSGE) model, we extend the applicability of this model to institutional design aiming at facilitating healthy, harmonious, and sustained development.
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