Event

High levels of public debt are correlated with lower economic growth across countries, but questions remain about whether this relationship is causal. Using Chinese data, this paper explores whether increasing public debt crowds out private investment. City-level investment ratios are found to be negatively correlated with local government debt for private manufacturing firms, but not for state-owned or foreign-owned manufacturers. This suggests that as well as the short-term benefits of fiscal stimulus, there might also be negative longer-term effects, such as the crowding out of more efficient firms.