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China's Growing Government Debt in a Computable Overlapping Generations Model

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  • Shiyu Li
  • Shuanglin Lin
  • Yan Wang
  • Fan Zhai

Abstract

This paper simulates the effects of China's growing government debt in a computable equilibrium model of overlapping generations. Our model assumes that the government increases debt to finance its spending in the short run, and then increases taxes or cuts spending to keep the debt–GDP ratio constant. The spending‐driven government debt increases public capital and output in the short run, but decreases private investment, total capital stock, output, and net exports in the long run, and makes the future generations worse off. Among various means of debt control, a decrease in government spending seems to be the least harmful to private investment, capital stock, and output while an increase in capital taxation is most detrimental.

Suggested Citation

  • Shiyu Li & Shuanglin Lin & Yan Wang & Fan Zhai, 2018. "China's Growing Government Debt in a Computable Overlapping Generations Model," Pacific Economic Review, Wiley Blackwell, vol. 23(3), pages 359-384, August.
    • Handle: RePEc:bla:pacecr:v:23:y:2018:i:3:p:359-384
    DOI: 10.1111/1468-0106.12172
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    Cited by:

    1. Rubo Zhao & Yixiang Tian & Ao Lei & Francis Boadu & Ze Ren, 2019. "The Effect of Local Government Debt on Regional Economic Growth in China: A Nonlinear Relationship Approach," Sustainability, MDPI, vol. 11(11), pages 1-22, May.
    2. Ge Gao & Jichang Dong & Xiuting Li, 2022. "Local Government Debt, Real Estate Investment and Corporate Investment: Evidence from China," Sustainability, MDPI, vol. 14(19), pages 1-21, September.

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