| The impact of exchange rate on the real economy has always been an important issue of interest to academics and policy makers.After the Asian financial crisis in the1990 s,many studies on the impact of exchange rate on national(regional)economies emerged,and researchers studied the macro effects of exchange rate factors from the perspectives of economic growth,international trade,capital flows,exchange rate transmission,etc.In 2005,after the People’s Bank of China announced the start of the RMB exchange rate reform,the RMB exchange rate entered a longer period of appreciation,and domestic Exchange rate-related research topics have also emerged.In recent years,China’s economy has been transformed into a high-quality and sustainable growth mode,and the leverage of the real economy,including residents,enterprises and the government,have increased one after another,especially after the global financial crisis in 2008.The supply-side reform of " three removals,one reduction and one supplement" in 2015 is the best answer to the problem of corporate leverage,and after the implementation of the reform,the leverage ratio of China’s corporate sector has been maintained at a relatively stable level.However,leverage in the residential and government sectors are still rising slowly and steadily,and the sudden epidemic in 2020 has exacerbated this situation,along with the increasingly large scale of local government hidden debt,and government leverage has begun to attract the attention of domestic scholars.As China continues to open up to the outside world,and despite the "counter-globalization" initiatives of individual countries in recent years,the overall globalization that has brought countries around the world closer together continues to deepen.The impact of exchange rate factors on the level of a country’s current account and capital flows has become more significant.In turn,changes in the level of current account and capital flows can have a significant impact on the composition of government budget constraints.Therefore,the choice of government financing decisions should take into account not only the economic determinants within the economy,but also the impact of external factors such as the exchange rate.To this end,this paper extends the issue of government leverage to the international finance domain,focusing on the effect of exchange rate factors on government leverage and the related mechanisms.The main contents and features of this paper’s research.(1)Study of the impact of exchange rate changes on government leverageIntuitively,the appreciation of a country’s currency causes its current account to contract,which affects the government’s budget constraint.Trehan & Walsh(1991)point out that government debt is sustainable based on the discounted value of its current and future fiscal revenues.Accordingly,when exchange rate changes act as exogenous shocks,the resulting changes in the current account may induce the government to change its budget constraint and thus adjust its existing financing options and affect the government leverage ratio.To this end,this paper constructs a theoretical model based on the ideas of Trehan & Walsh(1991)and Obstfeld & Rogoff(1996)for evolutionary derivation and finds the mechanism by which government leverage is affected by exchange rate changes.In other words,government leverage decreases with exchange rate appreciation,and furthermore,exchange rate appreciation forces the government to contract on the income side,and under the hard constraint of debt sustainability,government leverage will passively decline,i.e.,the "current account effect".To this end,this paper conducts an empirical analysis based on global panel data,and the results better validate the theoretical speculation.Various robustness tests also verify the basic reliability of the regression findings,and the examination of the "current account effect" in the mechanism test section also indicates that exchange rate changes can affect government leverage through the current account of a country(region).(2)Research on the impact of exchange rate fluctuations on government leverageThe impact of exchange rate factors on the government sector not only includes the impact of exchange rate level changes on the government,but also the impact of exchange rate on the government sector from the perspective of exchange rate volatility.Especially since the "8-11 exchange rate reform" in 2015,China’s exchange rate fluctuations have become more frequent,and in the past two years,global uncertainties have emerged frequently,and the volatility range of exchange rates in various countries(regions)has started to widen.The effect of exchange rate fluctuations on government spending and financing decisions will also increase.Therefore,it is necessary to examine the impact of exchange rate fluctuations along with the impact of government leverage on exchange rate movements.To this end,this paper constructs a theoretical model of the relationship between government leverage and exchange rate volatility based on the general government debt framework,combined with a skewed non-parity interest rate parity condition,which shows that a decrease in the level of exchange rate volatility will reduce the level of government leverage.Empirically,this paper constructs an exchange rate volatility indicator to specifically analyze the impact of exchange rate volatility on government leverage,which also verifies the model inference.The fact that a decrease in exchange rate volatility will reduce government leverage holds in considering endogeneity and various robustness tests,and finally,the transmission mechanism of government leverage affected by exchange rate volatility is given through a micro mechanism discussion(3)Study on the influence of exchange rate factor on government leverage under the heterogeneity of financial development levelFinancial development is currently a hot topic of academic research.Since the sovereign debt crisis in emerging market countries at the end of last century,some scholars believe that the fragility of the financial system is the root cause of the previous crisis,and the research perspective has gradually shifted to the relationship between financial development and macroeconomics,and a number of scholars have been involved in examining the role of financial development as a moderating variable in economic activities.In this paper,we analyze the influence of exchange rate factor on government leverage from the perspective of heterogeneity in the level of financial development of countries(regions).From the perspective of heterogeneity of financial development levels of countries(regions),the effect of exchange rate factors on government leverage is lower in countries(regions)with higher financial development levels.Further subdividing the financial development level indicators into financial infrastructure development level and financial market development level reveals that the heterogeneity of financial infrastructure development level has a more significant effect on the effect of exchange rate changes on government leverage,and the heterogeneity of financial market development level has a more significant effect on the effect of exchange rate fluctuations on government leverage.This finding is in line with the expectations of this paper.On the one hand,according to the theoretical model of this paper,a developed financial infrastructure facilitates internal financing and can improve the financing constraints of the residential sector,which in turn reduces the level of exchange rate changes affecting government leverage via the current account.On the other hand,exchange rate fluctuations affect the government leverage mainly through the capital market,and the active financial market can alleviate the constraints imposed by limited trading agents on the establishment of interest rate parity,thus reducing the transmission of exchange rate fluctuations to government leverage.Subsequent robustness tests such as replacing the financial development level indicator,excluding government foreign debt,and introducing instrumental variables also support the relevant findings.(4)Study on the influence of exchange rate factors on government leverage under the heterogeneity of globalization levelsWith the changing political and economic landscape of the world,the rapid globalization process that has lasted for more than two decades worldwide is now gradually slowing down.Thanks to globalization in the past two decades,our country has seen a golden age of economic take-off,and as the external environment is perhaps changing in a long-term trend,it is necessary to include globalization factors in the analysis of this paper to prepare in advance for future changes in external conditions.From the perspective of heterogeneity in the level of globalization of countries(regions),the effect of exchange rate factors on government leverage is lower in countries(regions)with higher levels of globalization and higher in countries(regions)with lower levels of globalization.In the regressions of globalization sub-indicators,it is found that the cross product terms of economic globalization(trade,finance)and social globalization are more significant with exchange rate changes,while political globalization is not significant;the cross product terms of political globalization and social globalization are more significant with exchange rate fluctuations,while economic globalization is not significant.That is,heterogeneity in the level of economic and social globalization is more significant for the effect of exchange rate changes on government leverage,and heterogeneity in the level of political and social globalization is more significant for the effect of exchange rate fluctuations on government leverage.Subsequent robustness tests such as adjusting the sample interval,excluding government foreign debt,and introducing instrumental variables also support the relevant findings.(5)Study on the influence of exchange rate factor on government leverage ratio under the heterogeneity of capital control levelAccording to the theoretical analysis of this paper,only when the level of capital controls in a country(region)is below a certain limit,the channel of transmission through capital flows,which is the non-surplus interest rate parity,will be effective,and thus exchange rate fluctuations can affect the government leverage ratio,but when the level of controls exceeds the threshold value,the transmission channel is blocked and the effect of exchange rate fluctuations will no longer be significant.Therefore,this paper will analyze the impact of exchange rate fluctuations on government leverage from the perspective of heterogeneity in the degree of capital controls in countries(regions).From the perspective of heterogeneity in the degree of capital control of countries(regions),the effect of exchange rate fluctuations on government leverage is insignificant in countries(regions)with higher degree of capital control,while the effect of exchange rate fluctuations on government leverage is more significant in countries(regions)with lower degree of capital control.The original conclusion still holds after replacing the indicator of total capital control level with the indicator of debt capital control level.This is consistent with the inference of the theoretical model in this paper,because the effect of exchange rate volatility on government leverage is based on the existence of the traditional bias in the non-complementary interest rate parity.An important condition for the non-complementary parity to hold is that capital is free to move internationally so that arbitrage capital can be traded in the foreign exchange market to change the exchange rate level.Accordingly,when a country(or region)has strict capital controls,the link between domestic and foreign spreads and the exchange rate is very limited,thus blocking the channel through which exchange rate fluctuations affect government leverage in this model.The subsequent robustness tests such as excluding government foreign debt and introducing instrumental variables also support the relevant findings.Based on the existing findings,this paper puts forward several policy recommendations,including moderate appreciation of the RMB within a controlled range,ensuring that the RMB exchange rate fluctuates within a reasonable range,improving the construction of China’s financial infrastructure and financial markets in a multi-dimensional and comprehensive manner,continuing to promote a high level of opening up to the outside world,and prudently pushing forward the reform of the RMB exchange rate formation mechanism.The possible innovations of this paper mainly lie in the following points.First,current research on the association between exchange rate factors and government leverage focuses on the government’s external debt component,with little examination of internal debt.In this paper,we combine the classical government present value budget constraint approach and the offsetting non-parity interest rate parity condition for theoretical modeling and empirical testing of model inferences to consider the possible impact of exchange rate factors on government internal leverage.It reveals the intrinsic linkage and extends the relevant research on government leverage to provide a more realistic reference basis for government department debt decisions and market-oriented RMB exchange rate reform.Second,most of the current empirical tests on the impact of exchange rate factors on economic fundamentals have been conducted only from one aspect of exchange rate changes or exchange rate volatility levels,but this paper integrates both into the empirical testing framework.Based on the theoretical mechanism of the intrinsic correlation between exchange rate movement,exchange rate volatility and government leverage,this paper enriches the research content of this paper by considering both exchange rate movement and exchange rate volatility to empirically test the relevant findings of the theoretical model with the help of the empirical method of econometric statistical analysis,and conducting multiple types of robustness tests on the basic findings.Third,after empirically testing the basic findings,we investigate the heterogeneity of government leverage among countries(regions),explore the relationship between exchange rate and heterogeneous government leverage,and expand the effects of financial development,globalization,and capital control to find more realistic factors and effects of government leverage.This will provide a valuable reference for China to "develop a higher level of open economy". |
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