In this study, we examine how local government debt responds to environmental policies in China. We show that when an environmental policy impacts the economy, local governments are likely to increase debt issuance, with this effect becoming stronger when local officials have greater career incentives within the Chinese bureaucratic system. Over-accumulation of local government debt, which leads to social welfare losses, is closely tied to the urgency local officials feel to secure promotions. Our analysis offers valuable insights for better coordination between fiscal and environmental policies.

Multiple-equilibria macroeconomic models suggest that consumers' and investors' perceptions about the state of the economy may be important independent factors for business cycles. In this paper, we verify empirically the interrelations between waves of optimism and pessimism and subsequent economic fluctuations. We focus on the behavior of nonfundamental movements in the consumer sentiment index, as a proxy for consumers' sunspots, and in the business formation index, representing investors' animal spirits, around economic turning points. We find that bearish consumers and entrepreneurs were present before the onset of some U.S. economic downturns, sometimes even when the fundamentals were all very strong. In particular, our analysis shows that self-fulfilling pessimism may have played a nontrivial role in the 1969–1970, the 1973–1975, and the 1981–1982 recessions. The results are robust to a range of alternative linear and nonlinear specifications. Our evidence provides some empirical support for the role of nonfundamental rational expectations in economic fluctuations.