The crowding-out effect of government debt: A loan financing-based perspective

In recent years, economic research has increasingly focused on the increase in local government debt, attracting the attention of government regulators. Using data from 2006 to 2022, this study empirically examines how local government debt affects financing activities. The results reveal local government debt' s crowding-out effect on financing, particularly for non-state-owned enterprises. Further analysis reveals that this negative impact is driven by 'passive crowding-out' rather than 'active choice' for enterprises. Local governments can directly influence commercial banks, and commercial banks prefer holding local government debt. Moreover, while new local government debt initially boosts economic growth, the continuous accumulation of debt stock exacerbates the crowding-out effect, impacting overall output. These findings provide insights into the micro-level implications of local government fiscal policies and offer guidance for advancing debt system reforms.