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The Effect of Local Government Debt on Regional Economic Growth in China: A Nonlinear Relationship Approach

Rubo Zhao (), Yixiang Tian (), Ao Lei (), Francis Boadu () and Ze Ren ()
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Rubo Zhao: School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China
Yixiang Tian: School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China
Ao Lei: School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China
Francis Boadu: School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China
Ze Ren: School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China

Sustainability, 2019, vol. 11, issue 11, 1-22

Abstract: By drawing on the concept of sustainable economic development, this study advances the research on debt sustainability in the economic literature. We explore the correlation between local government debt and regional economic growth in 30 provinces in China. Previous studies have established that the development of economic growth between regions is not independent and we, therefore, investigate the spatial effect of regional economic growth due to the existence of a spatial spillover effect or spatial expansion among regions. Using Moran’s scatter plot, a Local Indicator of Spatial Association (LISA) map, and a semiparametric spatial model (SE-SDM), our results demonstrate the following: (1) the spatial agglomeration effect has a significant influence on regional economic growth; (2) the relationship between local government debt and regional economic growth presents nonlinear characteristics, rather than having an inverted U-shaped relationship; (3) the semiparametric spatial model more accurately characterizes in the nonlinear relationship between local government debt and regional economic growth compared to a basic regression model and the spatial Durbin model; and (4) when the scale of local government debt exceeds a certain level, economic growth will be suppressed by the crowding-out of private investment and the reduction of public expenditure.

Keywords: local government debt; regional economic growth; spatial effect; semiparametric spatial model (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2019
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