Economic Growth, Public and Private Investment: A Comparative Study of China and the United States

Public and private investments play a central role in production functions by providing the required capital for development. There are many studies in the literature investigating the linear macroeconomic relations based on public and private investment in cross-country and country-specific analyses by focusing on various perspectives and methodologies. However, there is a gap in the literature in exploring nonlinear causal relations among public-private investment and economic growth, particularly in the U.S. and China, in order to comparatively discuss policy implementations and potential implications. To narrow the gap, this study investigates nonlinear causal relationships between public-private investment and gross domestic product in the U.S. and China, which are the largest economies comprising about 40 percent of the global gross domestic product (GDP) in 2018. These countries show a similar pattern in economic growth and implementing sustainable development goals, although they follow considerably different socio-economic regimes and fall into different development levels (i.e., developed and developing countries). Therefore, there should be a common underlying mechanism in macroeconomic factors that fosters economic development. In this regard, the motivation behind the study is to reveal a common, but hidden, behavior of the nonlinear causal relations of given macroeconomic factors in these countries to make recommendations about sustainable economic growth for policymakers. To this end, there are three main contributions of the paper. First, the research finds nonlinear dependencies in the related time series between 1960-2015, thereby nonlinear causality tests are performed to reach more reliable information than the linear causality. Second, the study formulates a feedback loop between public and private investment through economic growth, which indicates that public and private investment should stimulate each other directly or indirectly (i.e., through the GDP). Third, the direction of the causality does not affect sustainable economic growth as long as it exists directly or indirectly.