Upstream subsidy or downstream subsidy? A quantitative analysis of credit subsidy in China

Hengxu Song, Zhongchao Yang and Yue Zhou

Economic Modelling, 2023, vol. 129, issue C

Abstract: We construct a multi-industry general equilibrium model to study the effects of industrial credit policies. This model is characterized by firm heterogeneity, credit constraints, and production network. We calibrate the model using data from China and show that downstream industries face much tighter credit constraints than upstream industries. However, the key finding of our model is that upstream credit subsidy is more effective than downstream subsidy in increasing aggregate output and capital stock. The input–output linkages between upstream and downstream industries are the driving force behind this outcome. Our research also suggests that credit subsidy might encourage firms to use more capital and less labor in production. We extend the benchmark model to several industries and show that our key result is robust.

Keywords: Credit subsidy; Production network; Firm heterogeneity; China economy (search for similar items in EconPapers)
JEL-codes: E23 E51 L52 O25 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:129:y:2023:i:c:s0264999323003516

DOI: 10.1016/j.econmod.2023.106539

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