Who provides the capital for Chinese growth: the public or the private sector?

Xiaodong Chen, Patrick Minford, Kun Tian, Peng Zhou

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We focus on the role of the government in the provision of investment in China, through the medium of a Dynamic Stochastic General Equilibrium model of the economy in which the form of the production function reflects this governmental role. Using indirect inference, we estimate and test for the elasticity of substitution between government and nongovernment capital in both Constant Elasticity of Substitution (CES) and Cobb-Douglas technologies. The results underscore the strong substitution relationship between government and nongovernment capital from 1949, supporting CES rather than the Cobb-Douglas technology. They also show that the orientation of public investment changed after the start of the 'Socialist Market Economy' in 1992: government capital became more complementary to nongovernment capital as it focused more on infrastructure and withdrew from industrial production, intervening only in times of crisis, for stabilization purposes, indirectly via the state banks.

Original languageEnglish
Pages (from-to)2238-2252
Number of pages15
JournalApplied Economics
Issue number23
Early online date26 Oct 2016
Publication statusPublished - 2017


  • China
  • government investment
  • indirect inference
  • economic growth

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