Does Public Infrastructure Breed Consumption Downgrade and Overcapacity in China? A DSGE Approach on Macroeconomic Effects

Youze Lang and Qiuyi Yang
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Youze Lang: School of Economics, Shanghai University of Finance and Economics, 111 Wuchuan Road, Shanghai 200433, China
Qiuyi Yang: School of Economics, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan 430074, China

Sustainability, 2019, vol. 11, issue 3, 1-23

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.

Keywords: sustainable growth; public infrastructure expenditure; Dynamic Stochastic General Equilibrium (DSGE) model; consumption downgrade; overcapacity (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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