Public Debt Stability in the People’s Republic of China: Rethinking the Domar Condition and Its Bond Market Application
Publication | September 2021
This paper extends the supply side argument of the Domar model for fiscal sustainability and examines the case of the bond market in People’s Republic of China.
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The authors find that public debt sustainability depends on the sensitivity of interest rates to changes in government bond supply and demand. This is true in the case of the People’s Republic of China, Greece, and Japan. This modified fiscal sustainability condition suggests that the opening of capital markets to nonresident investors is important together with stability of the bond market.
Contents
- Introduction
- The Domar Condition with Constrained Demand
- Example of Decentralized Fiscal System
- The Model: Application to Decentralized Fiscal System
- Factors Affecting Interest Rate Sensitivity
- Thresholds in the Share of Overseas Investors in Government Bond Markets
- Conclusion
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