Testing For Linear And Nolinear Granger Causality Between Government Debt And Consumption In China

The Chinese government launched a 4 trillion yuan economic stimulus plan in 2008, shared by the central and local government, and local government also provided the corresponding financial supporting measures. These measures were good to promote China’s economic growth, but they also brought about huge government debt. According to results of national government debt released by the National Audit Office by the end of June 2013,national government debt increased by 9.0%, in which the central government debt increased by 4.21% and local government debt increased by 12.62%, compared to the cases by the end of 2012. Meanwhile, China’s economic had improved significantly over the past 30 years, the final consumption expenditure also had a certain growth, but the final consumption rate has continued to decline, the growth rate of final consumption expenditure was also lower than the growth rate of GDP in the most years. Although the overall risks of government debt are controllable, the rapid growth of China’s government debt scale and weak consumption have made the relationship between government debt and consumption become the focus of people’s attentions.Foreign scholars formed two schools in the study of the relationship between government debt and consumption, which are called “thought of Ricardian debt” and “thought of Keynesian debt”, the focus of their arguments is whether government debt can bring wealth to people. The thought of Ricardian debt thinks government debt will not increase people’s wealth, so it will not change people’s consumption level, the thought of Keynesian debt thinks government debt will increase people’s wealth and thus promote consumption. Foreign scholars used the relevant data of different countries to verify the performance of the thoughts of Ricardian debt and Keynesian debt in these countries, and the results are not the same. Whether thought of Ricardian debt or thought of Keynesian debt is more accord with the reality, foreign scholars had no unified conclusions. The empirical analysis of domestic scholars on the relationship between government debt and consumption in China are not many, so this paper uses the economic data of China to test the causality of the relationship between government deb and consumption, then inspects the performance of the thoughts of Ricardian debt and Keynesian debt in China.This paper firstly reviews the definition and nature of government debt, the sustainability of government debt, the relationship between government debt and the macro economy, the relationship between government debt and consumption, regression equation of consumption, the development and research results of the theories of the linear and non-linear Granger causality tests. Then this paper uses the official data and research achievements of other scholars to analyze the recent status of government debt and consumption in China. Then, the linear and non-linear Granger causality tests are used to examine the relationship between government debt and consumption in China with the data of the growth rate of per capita consumption and per capita debt from 1983 to 2013,the conclusion is that the causal relation between government debt and consumption in China is not significant. Because only when the features of time series data are stationary, can the linear Granger causality test be used, so this paper firstly tests the stationarity of the data in the linear Granger causality test. In addition, the nonlinear causality from the government debt to consumption may be only a simple flow of information because of ARCH effect, therefore this paper considers the interference of ARCH effect in the nonlinear Granger causality test, the conclusion is same as the nonlinear causality without ARCH effect. Finally, this paper summarizes the results of the linear and nonlinear Granger causality test of government debt and consumption in China arounded the thoughts of Ricardian debt and Keynesian debt, the reasons of the results may be people’s financial consciousness is relatively weak, income distribution is inequality and social security system is not perfect in China.