The Intertemporal Causal Dynamics Between Fixed Capital Formation and Economic Growth in The Group-Of-Seven Countries

The debate between De Long and Summers (1991, 1992) and Blomstrom, Lipsey and Zejan (1996) who reported conflicting results on the relationship between fixed capital formation and economic growth raised doubts on whether changes in a country's capital formation shares in GDP have an influence on its future growth rates. This paper addresses the issue again by examining the causal patterns between the share of fixed investment in GDP and the growth rate of per capital real GDP on an individual country basis, using time series on each of the group-of-seven countries. The empirical results suggest that the causal relationship between these variables may vary significantly across the major industrialized countries that presumably belong to the same growth group. Most importantly, no consistent evidence is found that causality is running in only one direction. Rather, causality between fixed investment and growth seems to have a country-specific nature and may run in either directions.