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How fiscal rules affect the cyclicality of local government debt? Evidence from China

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  • Mingjuan Liao

    (Beihang University)

  • Zhixin Liu

    (Beihang University)

  • Yingying Xu

    (Beihang University)

Abstract

Fiscal rules are an important fiscal tool to manage government debt in many countries, but their impact on local government debt has not been fully explored in China. Based on provincial panel data, we find that explicit debt is countercyclical, whereas implicit debt is procyclical. This study innovatively constructs an indicator system of fiscal rules for China for the first time and finds that fiscal rules increase the countercyclicality of explicit debt and the procyclicality of implicit debt. Additionally, fiscal rules exhibit a stronger effect on the countercyclicality of explicit debt but a weaker effect on the procyclicality of implicit debt in regions with high dependence on transfer payments, limited financing environment, or high institutional quality. After the 2008 global financial crisis, the effect of fiscal rules on increasing the countercyclicality of explicit debt is more pronounced, whereas the effect on increasing the procyclicality of implicit debt is relatively weaker.

Suggested Citation

  • Mingjuan Liao & Zhixin Liu & Yingying Xu, 2025. "How fiscal rules affect the cyclicality of local government debt? Evidence from China," Empirical Economics, Springer, vol. 69(1), pages 465-515, July.
    • Handle: RePEc:spr:empeco:v:69:y:2025:i:1:d:10.1007_s00181-025-02736-x
    DOI: 10.1007/s00181-025-02736-x
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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