This paper aims to examine the dynamic characteristics of local government debt in the economic cycle and to explore the reasons. Using the provincial panel data from 2002 to 2014 and system GMM, this paper finds that the accumulation rate of local debt is characterized by procyclicality. With each additional percentage of the output gap, the implicit debt growth rate may increase by 5.92% and 3.97% respectively during the boom and recession. Even with controlled the market financing environment, this feature is still evident. Further empirical analysis finds that officials’ promotion pressure aggravates the pro-cyclical nature of local debt. Local debt is not only an important financing tool for local governments to ease capital constraints and stimulate economic growth, but also threatens economic
stability because of its risk attributes. This paper argues that local governments have different emphasis on their goals at different stages of the economic cycle which may be an important reason for the pro-cyclical characteristics of local debts.
Keywords: local debt, economic cycle, promotion pressure
China Finance and Economic Review
Volume 7 Number 4 Winter 2018.P89