Financial Market Development and Government Debt Risk in China: Discussion on the Linkage of Fiscal Policy

Abstract

On the basis of sorting out the influence of financial market development on government debt risk in China, this paper explores the specific function mechanism of these two based on the framework of the integration of the economy, public finance and finance, and analyzes the linkage between this mechanism and the adjustment to fiscal policy through sensitivity analysis and fiscal response function. It comes to the results that at present financial market development affects the sustainability of government debt risk mainly through funding capability, and both long-term equilibrium and short-term dynamic adjustment show the active effects of improving government financing environment and are not vulnerable to fiscal policy shocks, alleviating long-term equilibrium volatility of government debt risk resulting from changes in economic climate and realizing active prevention against cyclical risk volatility. Meanwhile, combining with the reality of tentative appearance of financial fatigue in China, financial market development is beneficial to the realization of sound cycle of fiscal adjustment, the expansion of policy maneuver space and the alleviation of potential risk volatility. In addition, after big crises in the history, different fiscal prevention measures result in significant differences in short-term volatility of government debt risks.