Credit Constraint, Heterogeneous Productivity And Business Cycles Of China

During the past few decades, China has experienced economic fluctuations of special characteristics, which are quite different from that of the developed countries. This makes the traditional Real Business Cycle theory unable to well explain the business cycle facts of China. Considering the special situation of China, some specific institutional factors must be taken into account while exploring the Chinese business cycle phenomenon. The financial reform of China has brought about tremendous influence to the Chinese economy since it was initiated in1978. However, this reform lagged behind the reform of the state-owned enterprises. This gives government more power to manipulate the state-owned banks and control the allocation of financial resources. However, government tends to allocate more resources to the state-owned enterprises for some reasons. In contrast, private-owned enterprises, although more productive than the state-own enterprises, always face credit constraints. This problem does not seem to be well resolved along with the deepening of the Chinese financial reform. Whether this kind of asymmetric credit constraint and heterogeneous productivity among the firm level are a major source of Chinese economic fluctuations is a problem worth exploring.In this paper, we capture the specific characteristic of China and incorporate asymmetric credit constraints and heterogeneous productivity of firms into the standard Real Business Cycle model of Hansen(1985), and explore their business cycle effects. Two kinds of firms are considered in our model:one kind is financially integrated and low-productivity firms, the most representative of which are the State-owned enterprises of China. These firms face little credit constraint. The other is firms that face credit constraint but have high productivity, such as many Chinese Private-owned enterprises, which enjoy only limited support from financial intermediaries or government policies. Based on these, we build a simple Dynamic Stochastic General Equilibrium model, solve the model using discrete-time dynamic optimization methods, obtain appropriate model parameter values through calibration and Bayesian estimation, conduct stochastic simulation, explore model performance by comparing theoretical and empirical moments, and finally conduct impulse response analysis. Up to this point, we find that the model with asymmetric credit constraint and heterogeneous productivity can well match the data for some key variables, but it overestimates the volatility of output. Finally, we point out the possible reasons for the result, figure out some possible methods to improve model performance, and point out future research directions.The research topic in this paper has great practical value. On the one hand, it helps us understand whether the Chinese market reform(mainly embodied by the reform of the State-owned enterprises) has great influence on the business cycle characteristics of China, and thus find out the significance of the market reform. On the other hand, central banks of most countries in the world will adopt dynamic stochastic general equilibrium method while making monetary policies. This research is meaningful as it indicates whether the Chinese central bank should take into account the firm-level asymmetric credit constraints in order to make effective and efficient monetary policy analysis.