Hostname: page-component-68c7f8b79f-7wx25 Total loading time: 0 Render date: 2025-12-20T15:06:08.337Z Has data issue: false hasContentIssue false
  • English
  • Français

Rising government debt on the path of going green in China

Published online by Cambridge University Press:  27 November 2024

Haoyang Li ,
Yuqin Wang ,
Guohan Yang  and
Tongbin Zhang
Haoyang Li
Affiliation:
College of Economics and Management, Nanjing Agricultural University, Nanjing, China
Yuqin Wang
Affiliation:
School of Economics, Shanghai University of Finance and Economics, Shanghai, China Key Laboratory of Mathematical Economics (SUFE), Ministry of Education, China
Guohan Yang
Affiliation:
JT Asset Management Co. Ltd., Beijing, China
Tongbin Zhang*
Affiliation:
School of Economics, Shanghai University of Finance and Economics, Shanghai, China Key Laboratory of Mathematical Economics (SUFE), Ministry of Education, China
*
Corresponding author: Tongbin Zhang; Email: tongbin.zhang.econ@gmail.com
Get access Rights & Permissions [Opens in a new window]

Abstract

In this study, we examine how local government debt responds to environmental policies in China. We show that when an environmental policy impacts the economy, local governments are likely to increase debt issuance, with this effect becoming stronger when local officials have greater career incentives within the Chinese bureaucratic system. Over-accumulation of local government debt, which leads to social welfare losses, is closely tied to the urgency local officials feel to secure promotions. Our analysis offers valuable insights for better coordination between fiscal and environmental policies.

Keywords

government debtenvironmental policyeconomic fluctuationsE32E62H74P16Q58

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e61
Copyright
© The Author(s), 2024. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Adelino, M., Cunha, I. and Ferreira, M. A.. (2017) The economic effects of public financing: evidence from municipal bond ratings recalibration. The Review of Financial Studies 30(9), 3223–3268.CrossRefGoogle Scholar
Alesina, A. and Tabellini, G.. (1990) A positive theory of fiscal deficits and government debt. The Review of Economic Studies 57(3), 403–414.CrossRefGoogle Scholar
Ambrose, B. W., Deng, Y. and Wu, J.. (2015). Understanding the risk of China’s local government debts and its linkage with property markets. Available at SSRN 2557031.CrossRefGoogle Scholar
Bai, C.-E., Hsieh, C.-T., Song, Z.. (2016) The long shadow of China’s fiscal expansion. Brookings Papers on Economic Activity 2016(2), 129–181.CrossRefGoogle Scholar
Baker, L. H., Collins, W. J., Olivié, D. J. L., Cherian, R., Hodnebrog, Ø., Myhre, G. and Quaas, J.. (2015) Climate responses to anthropogenic emissions of short-lived climate pollutants. Atmospheric Chemistry and Physics 15(14), 8201–8216.CrossRefGoogle Scholar
Bernanke, B. S., Gertler, M. and Gilchrist, S.. (1999) The financial accelerator in a quantitative business cycle framework. Handbook of Macroeconomics 1, 1341–1393.CrossRefGoogle Scholar
Bovenberg, A. L. and De Mooij, R. A.. (1994) Environmental levies and distortionary taxation. The American Economic Review 84(4), 1085–1089. Google Scholar
Brunnermeier, M. K. and Landau, J.-P.. (2020) Central banks and climate change. Disponible en VoxEU. org: https://voxeu.org/article/central-banks-and-climate-change Google Scholar
Chay, K. Y. and Greenstone, M.. (2003) The impact of air pollution on infant mortality: evidence from geographic variation in pollution shocks induced by a recession. The Quarterly Journal of Economics 118(3), 1121–1167.CrossRefGoogle Scholar
Chen, Y. J., Li, P. and Lu, Y.. (2018) Career concerns and multitasking local bureaucrats: evidence of a target-based performance evaluation system in China. Journal of Development Economics 133, 84–101.CrossRefGoogle Scholar
Chen, Z., He, Z. and Liu, C.. (2020) The financing of local government in China: stimulus loan wanes and shadow banking waxes. Journal of Financial Economics 137(1), 42–71.CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. and Evans, C. L.. (1999) Monetary policy shocks: what have we learned and to what end? Handbook of Macroeconomics 1, 65–148.CrossRefGoogle Scholar
Cui, J., Wang, C., Zhang, J. and Zheng, Y.. (2021) The effectiveness of China’s regional carbon market pilots in reducing firm emissions. Proceedings of The National Academy of Sciences of The United States of America 118(52), e2109912118.CrossRefGoogle ScholarPubMed
Duval, R., Hong, G. H. and Timmer, Y.. (2020) Financial frictions and the great productivity slowdown. The Review of Financial Studies 33(2), 475–503.CrossRefGoogle Scholar
Eberhardt, M. and Presbitero, A. F.. (2015) Public debt and growth: heterogeneity and non-linearity. Journal of International Economics 97(1), 45–58.CrossRefGoogle Scholar
Fan, H., Zivin, J. S. G., Kou, Z., Liu, X. and Wang, H.. (2019) Going green in China: Firms’ responses to stricter environmental regulations. NBER working paper series No. w26540, National Bureau of Economic Research.CrossRefGoogle Scholar
Fan, J. P. H., Wong, T. J. and Zhang, T.. (2007) Politically connected CEOs, corporate governance, and post-IPO performance of China’s newly partially privatized firms. Journal of Financial Economics 84(2), 330–357.CrossRefGoogle Scholar
Fan, M., Ge, S., Li, H. and Zhao, J.. (2021). The role of state capitalism and marketization in China’s war against pollution: firm-level evidence. Available at SSRN 3924031.CrossRefGoogle Scholar
Feng, Y., Ning, M., Lei, Y., Sun, Y., Liu, W. and Wang, J.. (2019) Defending blue sky in China: effectiveness of the “Air Pollution Prevention and Control Action Plan” on air quality improvements from 2013 to 2017. Journal of Environmental Management 252, 109603.CrossRefGoogle Scholar
Galí, J. and Rabanal, P.. (2004) Technology shocks and aggregate fluctuations: how well does the real business cycle model fit postwar US data? NBER Macroeconomics Annual 19, 225–288.CrossRefGoogle Scholar
Gentzkow, M. (2006) Television and voter turnout. The Quarterly Journal of Economics 121(3), 931–972.CrossRefGoogle Scholar
Giroud, X. and Mueller, H. M.. (2019) Firms’ internal networks and local economic shocks. The American Economic Review 109(10), 3617–3649.CrossRefGoogle Scholar
Gollin, D., Hansen, C. W. and Wingender, A. M.. (2021) Two blades of grass: the impact of the green revolution. Journal of Political Economy 129(8), 2344–2384.CrossRefGoogle Scholar
Goulder, L. H. (1995) Environmental taxation and the double dividend: a reader’s guide. International Tax and Public Finance 2(2), 157–183.CrossRefGoogle Scholar
Greenstone, M. (2002) The impacts of environmental regulations on industrial activity: evidence from the 1970 and 1977 clean air act amendments and the census of manufactures. Journal of Political Economy 110(6), 1175–1219.CrossRefGoogle Scholar
Greenstone, M. and Hanna, R.. (2014) Environmental regulations, air and water pollution, and infant mortality in India. The American Economic Review 104(10), 3038–3072.CrossRefGoogle Scholar
Greenstone, M., He, G., Li, S. and Zou, E.. (2021) China’s war on pollution: evidence from the First Five Years. Review of Environmental Economics and Policy 15(2), 281–299.CrossRefGoogle Scholar
Greenstone, M., List, J. A. and Syverson, C.. (2012) The effects of environmental regulation on the competitiveness of US manufacturing. NBER working paper series No. w18392, National Bureau of Economic Research.CrossRefGoogle Scholar
Greenstone, M., Mas, A. and Nguyen, H.-L.. (2020) Do credit market shocks affect the real economy? Quasi-experimental evidence from the great recession and “normal” economic times. American Economic Journal: Economic Policy 12(1), 200–225.Google Scholar
Guo, G. (2009) China’s local political budget cycles. American Journal of Political Science 53(3), 621–632.CrossRefGoogle Scholar
Halac, M. and Yared, P. (2022). Fiscal rules and discretion under limited enforcement. Econometrica 90(5), 2093–2127.CrossRefGoogle Scholar
He, G., Wang, S. and Zhang, B.. (2020) Watering down environmental regulation in China. The Quarterly Journal of Economics 135(4), 2135–2185.CrossRefGoogle Scholar
Huang, Y., Pagano, M. and Panizza, U.. (2020) Local crowding-out in China. The Journal of Finance 75(6), 2855–2898.CrossRefGoogle Scholar
Jacobson, L. S., LaLonde, R. J. and Sullivan, D. G.. (1993) Earnings losses of displaced workers. The American Economic Review 83(4), 685–709 Google Scholar
Jermann, U. and Quadrini, V.. (2012) Macroeconomic effects of financial shocks. The American Economic Review 102(1), 238–271.CrossRefGoogle Scholar
Karplus, V. J., Zhang, J. and Zhao, J.. (2021) Navigating and evaluating the labyrinth of environmental regulation in China. Review of Environmental Economics and Policy 15(2), 300–322.CrossRefGoogle Scholar
Li, H. and Zhou, L.-A.. (2005) Political turnover and economic performance: the incentive role of personnel control in China. Journal of Public Economics 89(9-10), 1743–1762.CrossRefGoogle Scholar
Liu, E. (2019) Industrial policies in production networks. The Quarterly Journal of Economics 134(4), 1883–1948.CrossRefGoogle Scholar
Lucas, J., Robert, E. and Nancy, L. S.. (1983) Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12(1), 55–93.CrossRefGoogle Scholar
Mankiw, N. G. (2016) Macroeconomics. New York: Worth Publishers: A Macmillan Education Imprint Google Scholar
Mao, J., Wang, C. and Yin, H.. (2022) Corporate responses to air quality regulation: evidence from a regional environmental policy in China. Regional Science and Urban Economics 98, 103851. CrossRefGoogle Scholar
Marcet, A. and Scott, A.. (2009) Debt and deficit fluctuations and the structure of bond markets. Journal of Economic Theory 144(2), 473–501.CrossRefGoogle Scholar
Martin, R., et al. (2014) Industry compensation under relocation risk: a firm-level analysis of the EU emissions trading scheme. The American Economic Review 104(8), 2482–2508.CrossRefGoogle Scholar
Mian, A. and Sufi, A.. (2014) What explains the 2007-2009 drop in employment? Econometrica 82(6), 2197–2223.CrossRefGoogle Scholar
Pappa, E. (2021). Fiscal Rules, Policy and Macroeconomic Stabilization in the Euro Area. In: Chapter in ECB Sintra Forum 2020 Conference Proceedings, pages 221–264 Google Scholar
Reinhart, C. M. and Rogoff, K. S.. (2010) Growth in a time of debt. The American Economic Review 100(2), 573–578.CrossRefGoogle Scholar
Reinhart, C. M. and Rogoff, K. S.. (2011) From financial crash to debt crisis. The American Economic Review 101(5), 1676–1706.CrossRefGoogle Scholar
Reinhart, C. M., Reinhart, V. R. and Rogoff, K. S.. (2012) Public debt overhangs: advanced-economy episodes since 1800. Journal of Economic Perspectives 26(3), 69–86.CrossRefGoogle Scholar
Schnabel, I. (2021) Climate change and monetary policy. Finance & Development 58(3), 53–55 Google Scholar
Schweizer, D., Walker, T. and Zhang, A.. (2019) Cross-border acquisitions by Chinese enterprises: the benefits and disadvantages of political connections. Journal of Corporate Finance 57, 63–85.CrossRefGoogle Scholar
Tanaka, S. (2015) Environmental regulations on air pollution in China and their impact on infant mortality. Journal of Health Economics 42, 90–103.CrossRefGoogle Scholar
Walker, W. R. (2011) Environmental regulation and labor reallocation: evidence from the Clean Air Act. The American Economic Review 101(3), 442–447.CrossRefGoogle Scholar
Walker, W. R. (2013) The transitional costs of sectoral reallocation: evidence from the clean air act and the workforce. The Quarterly Journal of Economics 128(4), 1787–1835.CrossRefGoogle Scholar
Wang, Z., Zhang, Q. and Zhou, L.-A.. (2020) Career incentives of city leaders and urban spatial expansion in China. Review of Economics and Statistics 102(5), 897–911.CrossRefGoogle Scholar
Xiong, W. (2019) The mandarin model of growth. Working Paper. http://wxiong.mycpanel.princeton.edu/papers/Mandarin.pdf CrossRefGoogle Scholar
Xu, H. (2017). “Very strict” central environmental protection inspections: uncovering problematic departments one-by-one. http://finance.people.com.cn/n1/2017/0808/c1004-29455687.html.Google Scholar
Yamazaki, A. (2022) Environmental taxes and productivity: lessons from Canadian manufacturing. Journal of Public Economics 205, 104560.CrossRefGoogle Scholar
Yared, P. (2010) Politicians, taxes and debt. The Review of Economic Studies 77(2), 806–840.CrossRefGoogle Scholar
Yared, P. (2019) Rising government debt: causes and solutions for a decades-old trend. Journal of Economic Perspectives 33(2), 115–140.CrossRefGoogle Scholar
Ye, B. and Lin, L.. (2020) Environmental regulation and responses of local governments. China Economic Review 60, 101421.CrossRefGoogle Scholar
Zhang, Z. and Xiong, Y.. (2020) Infrastructure financing. The Handbook of China’s Financial System. Princeton: Princeton University Press.Google Scholar
Supplementary material: File

Li et al. supplementary material

Li et al. supplementary material
Download Li et al. supplementary material(File)
File 332.3 KB