Government debt and stock bubbles in China

Miao Wang and Wenfu Wang

Economic Modelling, 2024, vol. 141, issue C

Abstract: Herein, we used Vector Autoregressive and Dynamic Stochastic General Equilibrium models to examine the relation between central government debt and stock bubbles in China. The empirical findings indicate a considerable negative correlation between central government debt and stock bubbles. The model's results also illustrate that the liquidity substitution effect mainly drives a negative linkage. When commercial banks hold government debt, the effect establishes a connection between central government debt and asset bubbles through commercial banks' balance sheets. Further analysis indicates that countercyclical fiscal policies impact the negative correlation between government debt and stock bubbles. The findings suggest that governments should regulate debt levels to manage asset bubbles.

Keywords: Government debt; Asset bubbles; Liquidity premium; DSGE model (search for similar items in EconPapers)
JEL-codes: E32 E44 G12 H63 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:141:y:2024:i:c:s0264999324002566

DOI: 10.1016/j.econmod.2024.106899

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