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Threshold effects of local government debt on economic growth: Evidence from 326 Chinese prefecture-level cities

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  • Liu, Chaoyang
  • Zhang, Zitong
  • Li, Aoyang
  • Zhang, Lu

Abstract

This paper examines the impact of local government debt on economic growth using a stock-flow consistent model. Utilizing panel data from 326 Chinese prefecture-level cities (2016–2024), it employs fixed effects and threshold models to test the hypotheses. Results show that explicit debt has an inverted U-shaped effect on growth, with the debt-to-GDP turning point between 58.53 % and 69.78 %. For urban investment bonds, the threshold ranges from 0.61 % (panel threshold model) to 16.33 % (quadratic model), highlighting their complexity and fragility. Non-standard debt consistently hampers growth before and after the turning point. Mediation analysis reveals that implicit debt promotes growth through credit expansion. The findings suggest that local government debt systems should prioritize explicit debt, maintain an optimal debt ratio, and focus on improving asset efficiency and investment returns in the short term. Long-term strategies should support market reforms to eliminate implicit financial decentralization, reduce local investment impulse, and address implicit guarantees associated with urban investment companies.

Suggested Citation

  • Liu, Chaoyang & Zhang, Zitong & Li, Aoyang & Zhang, Lu, 2026. "Threshold effects of local government debt on economic growth: Evidence from 326 Chinese prefecture-level cities," Finance Research Letters, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:finlet:v:88:y:2026:i:c:s1544612325024614
    DOI: 10.1016/j.frl.2025.109212
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