Abstract: Based on the theory of growth at risk,this papermeasures the economicdownside risk for each city in China,and empirically examines the impact of local government debt on the economic downturn risk under the background of the implementation of the new “budget law”.The result shows that the increase of local government debt can reduce the economic downside risk in the short term,while it will aggravate the economic downside risk in the medium and long term.This result remains robust not only by using different measures of local government debt and economic downside risk but also by taking spatial spillover effects and endogenous  situationsinto consideration.Moreover,after classifying the samples according to the level of economic marketization,this paper further finds that compared with the regions with a lower degree of economic marketization,the increase of local government debt will significantly reduce the economic downside risk in the short-term and significantly increase the economic downside risk in the long term in the regions with higher local government debt.And so is the increase of local government debt in the regions with larger economic downside risk.This paper further finds that local government debt will affect the economic downturn risk through three mechanisms,namely the investment crowding out mechanism,the credit crowding out mechanism and the innovation suppression mechanism.
Compared with the existing literature,this paper may have two marginal contributions.First,unlike most of the existing literature on economic downside risks focusing on the measurement and prediction of economic downside risks,this paper examines the causal relationship between the local government debt and the macroeconomic downside risks,whichenriches the literature on macroeconomic downside risks.Second,unlike most of the existing literature on local government debt focusing on the short-term economic effects of local government debt,this paper examines both the short-term and long-term economic effects of local government debt from an inter-temporal perspective,which broadens the research perspective on local government debt.
This paper not only provides a new perspective on the causal inference of economic downturn risks,but also provides a reference for effectively preventing systemic financial risks and local government debt risks and maintaining high-quality economic development.According to the conclusions,this paper makes several suggestions as follows.First,to control the scale of local government debt from the source and prevent systemic financial risks caused by localgovernment debt risks,the local governments should further establish the local government debt management system,improve the local government debt information disclosure system,actively implement the local government debt supervision and early warning mechanism,and strictly implement debt investment and financing decision-making mechanism.Second,the local governments should fully recognize the dual influence of the local government debt that the local government debt could be raised to improve the ability of local governments to regulate the economy,promote the rapid development of urban public infrastructure,and stimulate the stable growth of the local economy on one hand and the local government debt would bring negative impacts in the long term on the other hand.Last but not least,local governments should give more rights to micro-market entities,avoid excessive crowding out of enterprise resources,promote better allocation of market resources,minimize the negative consequence of local government debt on the macroeconomy,and constantly optimize the construction of macro-economic governance system,so as to ultimately obtain the high-quality economic development.