Reserve Requirements and Optimal Chinese Stabilization Policy

Chun Chang, Zheng Liu, Mark Spiegel and Jingyi Zhang

No 2016-10, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We build a two-sector DSGE model of the Chinese economy to study the role of reserve requirement policy for capital reallocation and business cycle stabilization. In the model, state-owned enterprises (SOEs) have lower average productivity than private firms, but they have superior access to bank loans because of government guarantees. Private firms rely on ?shadow? bank financing. Commercial banks are subject to reserve requirement regulations but shadow banks are not. Our framework implies a tradeoff for reserve requirement policy: Increasing the required reserve ratio acts as a tax on SOE activity and reallocates resources to private firms, raising aggregate productivity. This reallocation is supported by empirical evidence. However, raising reserve requirements also increases the incidence of costly SOE failures. Under our calibration, reserve requirement policy can be complementary to interest rate policy for stabilizing macro fluctuations and improving welfare.

JEL-codes: E44 E52 G28 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2016-06-17
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Reserve requirements and optimal Chinese stabilization policy (2019)
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DOI: 10.24148/wp2016-10

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