Abstract: By using the quarterly data from 1990 to 2012, this paper estimates the regime states, transition probability, and the regime correlation between fiscal expenditure and private investment by applying MS-VECM with varying parameters. It reaches the conclusion that in different economic development stages, the effects of fiscal expenditure on private investment vary, which are featured by regime transition with the alternation of crowing out and crowding-in effects. Further study also shows that the crowing-out effect refers to the stages with the rapid growth of fiscal expenditure, overheated economy and high inflation pressure. It shows that, to avoid the crowding-out effect, it should take the financing constraints of private sectors into account in financing arrangement of fiscal expenditure, and should timely make expansionary fiscal policy fade out under overheated economy or high inflation pressure.

Keyword: fiscal expenditure; crowding-out effect; crowding-in effect; MS-VECM