Local Government Debt,Maturity Mismatch And Macroeconomic Fluctuation

Under the joint action of the recently fiscal expansion program and local government replacement bonds,the scale of China's local government bonds is rising,and the average maturity of bonds is apparently to be longer.However,the average maturity of credit assets in the balance sheets of commercial banks,which is the main holder of government bonds,also have an obvious increasing tendency.The commercial banks are facing the dual maturity mismatch problem from government bonds and commercial credit.Based on China's economic reality,this paper constructs a new Keynesian model with the maturity mismatch problem in banks' balance sheet,and systematically studies the dual maturity mismatch problem caused by commercial credit and government bonds and the impact on macroeconomic and financial stability.To do so,we simulate the impulse response function of macro variables under different shocks and calculate the second-order fluctuation level of the main variables.Furthermore,this paper discusses the effect of differential reserve dynamic management mechanism on macroeconomic stability and financial sector stability through welfare analysis.The main findings of this paper are three fold:(1)Maturity mismatch caused by commercial credit affects the shock propagation mechanism between the real economy and the financial system.Maturity mismatch weakens the real sector's response to external shocks and counteracts the accelerating effects of financial frictions.In the face of macroeconomic shocks and financial market fluctuations,Banks' balance sheets absorb shocks and act as a financial shock absorber,but at the cost of increased volatility in the financial sector.(2)Maturity mismatch caused by government bonds strengthened the stability of bank leverage,but caused the increase of volatility of other financial variables.Faced with the tightening of budget constraints,commercial Banks can pursue the expansion of asset size by transferring credit assets into government bonds.However,under the assumption of interest rate stickiness,credit adjustment is limited,commercial Banks can only expand the holding scale of government bonds,and the fluctuation of total leverage level of Banks can be alleviated.If the maturity of government bonds is prolonged and the bond yield is reduced,the income of commercial Banks will shrink,leading to the reduction of leverage volatility in the financial sector but the increase of overall volatility.In addition,with the expansion of government bonds,the government has adopted a more proactive fiscal policy to ensure the smooth operation of the macro-economy.Long-term government bonds act as a financial buffer,but the risks in the banking sector behind them cannot be ignored.(3)The differential reserve dynamic adjustment mechanism can effectively stabilize the financial sector and the macro-economy,but when combined with monetary policy and fiscal policy,if the long-term trend of government bonds is obvious,the prudent policy is ineffective,and will instead aggravate economic fluctuations and reduce the level of social welfare.To sum up,this paper discusses the maturity mismatch of financial institutions from the perspectives of commercial credit and government bonds,discovers the "financial buffer mechanism" of the maturity mismatch of the balance sheet of commercial Banks,and reveals the fact of risk agglomeration in the financial sector under the surface of macroeconomic stability.