Interest-Rate Liberalization and Capital Misallocations

Zheng Liu, Pengfei Wang and Zhiwei Xu ()

No 2017-15, Working Paper Series from Federal Reserve Bank of San Francisco

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: E44 G18 O41 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2019-10-23
New Economics Papers: this item is included in nep-cna, nep-mac and nep-tra
Note: The first version of this paper was published May 2017.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Interest Rate Liberalization and Capital Misallocations (2021)
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DOI: 10.24148/wp2017-15

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