Abstract
Based on the panel smooth transition regression (PSTR) model, this paper empirically analyzes the relationship between Chinese local government’s bond financing and economic growth, with the quarterly panel data of bonds issued by local governments and their investment and financing platform companies in the open market from 2008 to 2018 as samples. The research shows that there is a gradual non-linear relationship between local government bond market financing and economic growth in China. With the increase of the scale of local government bond market financing in China, the effect of bond market financing on economic growth will gradually decline and have a negative effect. This result means that for developing countries like China, it is not advisable to rely solely on government investment to drive economic growth.
Highlights
In the midst of the 2008 global financial crisis, the Chinese Government implemented a RMB 4 trillion economic stimulus plan
Local governments have built up huge government debts, which are divided into "explicit debts" and "implicit debts", with the latter characterized by difficulty to count and data distortion
Bootstrap approach to carry out Wild Bootstrap (WB) and Wild Cluster Bootstrap (WCB) tests
Summary
In the midst of the 2008 global financial crisis, the Chinese Government implemented a RMB 4 trillion economic stimulus plan. Some scholars have reached completely different conclusions: for example, Dotsey argued that governments' debt-financed investment will lead to future tax distortions and hinder economic growth [5]; Baldaccie & Kumar and Cochrane argued that high government debt will hinder economic growth by changing people's expectations of long-term inflation [6,7]. Such disagreement has led scholars to explore the non-linear effects of government debt. Checherita & Rother and Mitze & Matz found an inverted U-shaped relationship between government debt and economic growth in eurozone countries [9,10]
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