Empirical Study About Influence Of Leverage Ratio On Economic Growth

Deleveraging and keeping steady growth are two seemingly contradictory things.Generally speaking,leverage increases economic growth.But we can't increase leverage indefinitely,because if the leverage ratio increases to a certain level,when the borrower can't repay the debt,there will be a default.If there is a large area of default,it is possible to lead to financial risks,and financial risks will quickly spread to the economic sphere and bring economic risks,thus leading to economic recession.On the contrary,deleveraging is likely to have a negative impact on economic growth.Therefore,there is an inevitable link between financial leverage and economic growth.There are some certain mechanisms between financial leverage on economic growth,including micro-mechanism and macro-mechanism.The micro-mechanism of financial leverage on economic growth is mainly transmitted through corporate theory,such as company value theory,company capital structure theory,bank run model,and credit cycle model,leverage cycle model.The macro-mechanism of financial leverage on economic growth covers consumption,debt,demand,risk,cycle and other aspects,including the equivalence principle,debt-deflation theory,theory of insufficient effective demand,financial accelerator theory,financial instability hypothesis,financial economic cycle theory and so on.Based on Greiner's “family-government”two-sector model in 2012,there is a “hump” relationship between economic growth rate and the ratio of government debt to private capital on the balanced growth path,that means there is a non-linear relationship.The paper's innovations are as follows:firstly,decomposing financial leverage and economic growth,which refines financial leverage as the scale and the growth rate of financial leverage,and refines economic growth as the growth rate and volatility.Secondly,broadening the variables of the scale of financial leverage.As we all know,the scale of financial leverage could not only be expressed by he proportion of broad currency to GDP and the proportion of loan to GDP,but by the proportion of government debt to GDP,the proportion of private sector domestic credit to GDP,and the Asset-liabilitiy ratio of industrialenterprises.Thirdly,the paper studies the threshold of the scale of financial leverage and the growth rate of financial leverage in China.If we take the scale of financial leverage as the threshold variable,there may be one or more threshold values.Basing on 58 sample countries at the international level(29 developed economies and 29 Emerging economies)and 31 provinces at the domestic level from 2000 to 2016 are selected,the paper studies the relationship between financial leverage scale and economic growth rate,financial leverage growth rate and economic growth rate,financial leverage scale and economic volatility rate,and financial leverage growth rate and economic volatility rate by System GMM model and Hansen threshold panel model.According to the results of theoretical models,international tests and domestic empirical studies,the paper draws the following conclusions:(1)There is a significant“inverted U” non-linear relationship between financial leverage growth rate and economic growth rate,also economic volatility rate.Taking broad money growth rate,loan balance growth rate,government debt growth rate and the change of asset-liability ratio of industrial enterprises as variables of financial leverage growth rate,this paper finds that there is a significant “inverted U” non-linear correlation between financial leverage growth rate and economic growth rate,also economic volatility rate.(2)Financial leverage scale has no significant “inverted U” effect on the economic growth rate and economic volatility rate.Taking the proportion of broad currency to GDP,the proportion of loan balances to GDP,the proportion of government debt to GDP,the proportion of private sector domestic credit to GDP and the asset-liability ratio of industrial enterprises as variables of financial leverage scale,this paper finds that the relationship between financial leverage scale and economic growth rate is not significant “inverted U”,so is economic volatility rate.(3)The key to balance deleveraging and keeping steady growth is to adjust financial leverage growth rate.The relationship between financial leverage scale and economic growth rate is uncertain,and relationship between financial leverage scale and economic volatility rate may be “U” or “inverted U” without practical significance.It's financial leverage growth rate that has significant effect on economic growth rate and economic volatility rate,thus adjusting financial leverage growth rate should be important measure,which proved by the results of theoretical derivation and empirical test.So adjusting financial leverage growth rate is key to balance deleveraging and keeping steady growth.(4)Adjusting financial leverage growth rate needs to refer to financialleverage scale.The “inverted U” non-linear relationship between financial leverage growth rate and economic growth rate has been further confirmed in the threshold effect test,so did economic volatility rate.Taking financial leverage scale as the threshold variable,by searching the threshold value,the paper can get different conclusions among different sections of financial leverage scale.That' why adjusting financial leverage growth rate needs to refer to financial leverage scale.(5)Not all control variables have the same impact on economic growth rate and economic volatility rate at the international and domestic levels.The degree of industrialization has a positive impact on economic growth rate,while a negative impact on economic volatility,but this negative impact has not passed the significant test at the domestic level.Capital formation rate has a significant positive impact on economic growth rate at the international level and a significant negative impact at the domestic level.This may be due to the fact that government investment accounts for a certain proportion in the investment structure of China,while government investment is mostly long-term projects,with few short-term returns.As economic development enters the shift period,the increase of government investment and the decline of economic growth rate occur at the same time,so the capital formation rate of China has a negative relationship with the economic growth rate.And the capital formation rate has a significant positive impact on the economic volatility rate.Inflation rate has a certain negative relationship with economic growth rate at the international level and a certain positive relationship at the domestic level,which shows that there is still much room for China to increase inflation rate,that is to say increasing inflation rate may stimulate economic growth rate.Inflation rate has a certain degree positive effects on economic volatility rate.One-year deposit interest rate has a certain negative impact on economic growth rate;one-year deposit interest rate has a certain negative impact on economic volatility rate at the international level and a certain positive impact at the domestic level,indicating that China's investment and consumption are not affected by interest rate changes,which may be due to government investment accounts for a large part,and the sensitivity to interest rate is very low,while the consumption of the vast majority of consumers is rigid demand,and the sensitivity to interest rate changes is very small.The urbanization rate has a certain negative impact on the economic growth rate,which is more significant in emerging economies such as China.Urbanization rate of emerging economies is relatively low,and the world economy has not yet entered a real recovery after the impact of the 2008 financialcrisis,so the increase of urbanization rate and decrease of economic growth rate occur at the same time.There is a positive relationship between the urbanization rate and economic volatility rate.The impact of population growth rate on economic growth rate is not necessarily certain.The reason may be that modern economy depends more on technological progress,and innovation has a certain substitution effect on labor force,thus the growth of labor force may not be one of the most critical factors of modern economic growth.Population growth rate has a positive impact on economic volatility rate.Because the financial leverage growth rate and economic growth rate and economic volatility rate have significant “inverted U” non-linear relationship,the financial leverage scale has no significant impact on economic growth rate and economic volatility rate,according to the scale and growth rate of financial leverage in China,and the conclusion drawn from the stress test that reducing China's financial leverage growth rate will not significantly reduce the economic growth rate,we need to refer to the financial leverage scale to deleveraging to balance between deleveraging and keeping steady growth.On the one hand,structural division should be applied in different sectors.Firstly,classifying local government debt and resolving the default risk.Secondly,classification should be used in deleveraging state-owned enterprises.On the other hand,the supply-side structural reform in the financial sector promotes steady economic growth.Firstly,increasing the proportion of direct financing and promoting the healthy development of multi-level capital markets.The second is to deepen the reform of the financial system by strengthening the financial capacity to support the real economy.The third is to stimulate the vitality of enterprises by structural tax adjustment.