A Vector Error Correction Model (VECM) Approach in explaining the relationship between Fixed Investment and Economic Growth in Rural China

Abstract

A rural economy can be affected by fixed investment in a rural area positively or negatively. Investment in fixed assets is one of the core measures of capital spending in rural China and the rural economy is a prominent part of china’s national economy. It is important to study the dynamic relationship between fixed investment and economic growth in rural China. Based on time-series data from 1990 to 2016, this paper employed a Vector Error Correction Model (VECM) approach to lead the stationarity test, Cointegration test, stability test, and granger causality test. The result indicated that, in the long term, Fixed Investment fluctuation promotes GDP growth in rural China while GDP fluctuation is not the source of fixed investment increase in rural China.