American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Interest Rate Liberalization and Capital Misallocations
American Economic Journal: Macroeconomics
vol. 13,
no. 2, April 2021
(pp. 373–419)
Abstract
We study the consequences of interest rate liberalization in a two-sector general equilibrium model of China. The model captures a key feature of China's distorted financial system: state-owned enterprises (SOEs) have greater incentive to expand production and easier access to credit than private firms. In this second-best environment, interest rate liberalization can improve capital allocations within each sector but can also exacerbate misallocations across sectors. Under calibrated parameters, the liberalization policy can reduce aggregate productivity and welfare unless other policy reforms are also implemented to alleviate SOEs' distorted incentives or improve private firms' credit access.Citation
Liu, Zheng, Pengfei Wang, and Zhiwei Xu. 2021. "Interest Rate Liberalization and Capital Misallocations." American Economic Journal: Macroeconomics, 13 (2): 373–419. DOI: 10.1257/mac.20180045Additional Materials
JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- L32 Public Enterprises; Public-Private Enterprises
- P24 Socialist Systems and Transitional Economies: National Income, Product, and Expenditure; Money; Inflation
- P31 Socialist Enterprises and Their Transitions
- P34 Socialist Institutions and Their Transitions: Financial Economics
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