Economic policy uncertainty and local government debt: Evidence from China

Abstract This paper investigates the effects of economic policy uncertainty on local government debt issuance in China and identifies a transmission channel through the cost of capital. Our findings demonstrate that economic policy uncertainty raises the cost of external financing for local governments, leading to decreased levels of debt issuance. Specifically, a 1% increase in uncertainty related to economic policy variations leads to a reduction in government debt issuance of 0.0478%. In addition, our analysis reveals that local governments located in regions experiencing lower fiscal pressure, lower economic catch‐up pressure, and higher sensitivity to uncertainty are more responsive to economic policy uncertainty changes.