How do financial variables impact public debt growth in China? An empirical study based on Markov regime-switching model

Tianbao Zhou, Zhixin Liu and Yingying Xu

Papers from arXiv.org

Abstract: The deep financial turmoil in China caused by the COVID-19 pandemic has exacerbated fiscal shocks and soaring public debt levels, which raises concerns about the stability and sustainability of China's public debt growth in the future. This paper employs the Markov regime-switching model with time-varying transition probability (TVTP-MS) to investigate the growth pattern of China's public debt and the impact of financial variables such as credit, house prices and stock prices on the growth of public debt. We identify two distinct regimes of China's public debt, i.e., the surge regime with high growth rate and high volatility and the steady regime with low growth rate and low volatility. The main results are twofold. On the one hand, an increase in the growth rate of the financial variables helps to moderate the growth rate of public debt, whereas the effects differ between the two regimes. More specifically, the impacts of credit and house prices are significant in the surge regime, whereas stock prices affect public debt growth significantly in the steady regime. On the other hand, a higher growth rate of financial variables also increases the probability of public debt either staying in or switching to the steady regime. These findings highlight the necessity of aligning financial adjustments with the prevailing public debt regime when developing sustainable fiscal policies.

Date: 2024-07
New Economics Papers: this item is included in nep-cna and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2407.02183 Latest version (application/pdf)

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:arx:papers:2407.02183

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().