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, liberalizing interest rate controls improves capital allocations within each sector, but exacerbates misallocations across sectors. Under calibrated parameters, interest-rate liberalization may 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: 47 pages
Date: 2017-05-01
New Economics Papers: this item is included in nep-cna, nep-mac and nep-tra
Note: Date of publication: May 2017.
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Journal Article: Interest Rate Liberalization and Capital Misallocations (2021)
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DOI: 10.24148/wp2017-15

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