Social Sciences in China (Chinese Edition)

No.6, 2018

Leverage, Economic Growth and Recession

(Abstract)

Liu Xiaoguang, Liu Yuanchun and Wang Jian

Using a unified analytical framework including financial deepening and the debt-deflation mechanism, we conducted an empirical analysis of large-scale multinational panel data from 179 countries (regions) from 1960 to 2015. Our findings show that changes in leverage have a nonlinear impact on economic growth and recession and that heterogeneity is present in the development stage and debt type. High savings rates and total factor productivity growth have significantly reduced the negative impact of increased leverage on economic growth and volatility. The conditions for the reversal of this relationship can be seen in the critical value of the contraction-triggering mechanism that disrupts the virtuous cycle of changes in the leverage ratio and the dynamic balance of economic growth. Since China’s economic growth may have gone beyond the critical value that triggers the contraction mechanism, the best option at present may be to “stabilize leverage” of the total amount, “de-leverage” structurally and “optimize leverage” in terms of efficiency.