A Research On Moderate Scale Of Local Government Debt

With the increase of explicit and implicit debt scale of local government,people pay more attention to the risk of local government debt in recent years.If we don’t take measures timely to control the scale of local government debt,it is likely that the local government can’t afford the debt one day.The discussion of the moderate scale of local government debt can not only provide reference for controlling the local government’s financial risk,but also has important significance to the orderly development of economic.The concern about the default risk of local government debt makes the credit risk model widely used in the research of local government debt.Among them,the KMV model based on Merton’s thought is favored by most scholars in the study of the moderate scale of local government debt.KMV model is suitable for risk measurement of individual assets.It does not need a lot of relevant historical data,which can make up the problem of absence of the default rate data.Therefore,the KMV model has a good applicability in estimating the scale of appropriate liabilities of a single local government.However,considering the correlation between the local government,the KMV model is not so effective.Therefore,this paper will use the DCC-Copula-GARCH model,which combines the principle of the KMV model and the factor Copula model,to illustrate the joint default risk of local governments,so as to provide reference for the moderate scale of local government debt.The empirical results of this paper show that the default risk of local government debt will be underestimated without considering the correlation between local governments.When the correlation between fiscal revenue growth rate of local government and macroeconomic variables equals to the historical mean,the moderate scale of local government debt is 7.01%.When it rises to the sum of historical mean and standard deviation,the scale of local government debt is reduced to 4.02%.