The nexus between local government debt risk, real estate sector, and financial stability

Yulong Li

Finance Research Letters, 2024, vol. 69, issue PA

Abstract: Rising local government debt and downturn in the real estate sector pose significant challenges to China’s economic growth and financial stability. To analyze these challenges, this paper develops a dynamic stochastic general equilibrium (DSGE) model to study the nexus between government debt risk, real estate sector, and financial stability. The findings suggest that an increase in debt risk initiated by a housing demand shock could have a persistent and magnified effect on the financial sector and the macroeconomy. The amplification mechanism originates from risk spillover and debt crowding-out effect, which trigger the negative feedback between the debt and financial risk. Longer debt maturity and the implementation of credit policy could effectively moderate the contractionary effects of this risk interaction on the economy.

Keywords: Sovereign default risk; Risk spillover; Financial stability (search for similar items in EconPapers)
JEL-codes: E32 E44 H6 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S154461232401105X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:69:y:2024:i:pa:s154461232401105x

DOI: 10.1016/j.frl.2024.106075

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().