Abstract: This paper theoretically analyzes the nonlinear relationship between local government debt and economic growth from the perspective of economic growth. It also makes an empirical test with the inter-provincial data since 2006. The findings can prove the nonlinear growth effect of China’s local government debt. When the debt ratio is lower, there is a positive correlation between local government debt and economic growth. As the debt ratio increases, the impact of debt on the local economic growth would be weakened. The analysis based on instrumental variables shows that this nonlinear effect reflects the causal relationship from local government debt to economic growth. Therefore, when making the positive financial policies of borrowing and increasing expenditures, the government should consider the short term effect and the long term influence of local government debt on the economic growth. As for the management of local government debt, it is suggested that the threshold value of debt ratio estimated dynamically should be used as the early warning index of debt, so as to identify the risks of local government debt more effectively.

Key words: local government debt; economic growth; fiscal policy; nonlinear growth effect