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| Implicit Government Guarantee, Default Risk and the Determination of Interest Rate |
| WANG Li, CHEN Shiyi
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| School of Economics, Fudan University |
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Abstract This paper firstly proposes an infinitely recursive model which includes a representative borrower and a representative lender. A special relationship between government and borrower—implicit guarantee is considered to explore the mechanism through which the implicit guarantee of government will impact the default risk and interest rate of bond. Theoretical analysis shows: the impact of implicit guarantee from the government on interest rate depends on regional economic development. If the economy is awful, implicit guarantee won't play an important role in the determination of interest rate since the passive expectation of investors decrease the credibility of implicit guarantee and the existence of any implicit guarantee fail to improve investors' expectation and thus help decreasing financing cost of bond issuers. However, when the economy gets better, implicit guarantee of governments becomes more and more convincing and it can help decrease the interest rate. Based on the theoretical analysis, this paper uses the data of Chinese urban investment bonds during 2006~2011 to test our model. The empirical analysis of this paper coincides with the theoretical predictions.
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Received: 20 May 2013
Published: 19 April 2018
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