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Public debt bubble and deflation: evidence from the Big Government impact in China

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  • Xinda Li
  • Xuefeng Shao
  • Hualu Shao

Abstract

This study extends Minsky’s framework by theorizing on how interventions designed to contain instability may inadvertently seed future fragility. We show that financial instability theory applies to public debt financing, which can trigger downward financial instability, leading to severe depressions, and upward financial instability, leading to severe inflation. The primary mechanism underlying this inherent fragility lies in the interplay in the economic growth model reliant on government investment, asset price fluctuations, and the liquidity amplification. We found some evidence in China supportive of this, where it serves as the best example of financial instability being “inherent,” in line with Minsky’s hypothesis. We explain why increased attention is needed to the endogenous instability of domestic government debt.

Suggested Citation

  • Xinda Li & Xuefeng Shao & Hualu Shao, 2025. "Public debt bubble and deflation: evidence from the Big Government impact in China," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 48(3), pages 375-399, July.
    • Handle: RePEc:mes:postke:v:48:y:2025:i:3:p:375-399
    DOI: 10.1080/01603477.2025.2503144
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