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The nexus between local government debt risk, real estate sector, and financial stability

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  • Li, Yulong

Abstract

Rising local government debt and downturn in the real estate sector pose significant challenges to China’s economic growth and financial stability. To analyze these challenges, this paper develops a dynamic stochastic general equilibrium (DSGE) model to study the nexus between government debt risk, real estate sector, and financial stability. The findings suggest that an increase in debt risk initiated by a housing demand shock could have a persistent and magnified effect on the financial sector and the macroeconomy. The amplification mechanism originates from risk spillover and debt crowding-out effect, which trigger the negative feedback between the debt and financial risk. Longer debt maturity and the implementation of credit policy could effectively moderate the contractionary effects of this risk interaction on the economy.

Suggested Citation

  • Li, Yulong, 2024. "The nexus between local government debt risk, real estate sector, and financial stability," Finance Research Letters, Elsevier, vol. 69(PA).
  • Handle: RePEc:eee:finlet:v:69:y:2024:i:pa:s154461232401105x
    DOI: 10.1016/j.frl.2024.106075
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    References listed on IDEAS

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    More about this item

    Keywords

    Sovereign default risk; Risk spillover; Financial stability;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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