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Interest Rate Liberalization and Capital Misallocations

Zheng Liu (), Pengfei Wang () and Zhiwei Xu ()

American Economic Journal: Macroeconomics, 2021, vol. 13, issue 2, 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.

JEL-codes: E43 E44 G32 L32 P24 P31 P34 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Interest-Rate Liberalization and Capital Misallocations (2017) Downloads
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DOI: 10.1257/mac.20180045

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