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How do local governments react to the accumulation of debt? Whereas public debt/GDP ratio has reached the worst levels in Japan, this paper provides evidence of corrective action: the marginal response of primary surpluses to changes in debt is increasing in the debt-GDP ratio. This paper also raises a puzzle that local governments in the rural area take corrective measure when the debt-GDP ratio starts rising, while local governments of the metropolis let the debt grow.
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