Interest-Rate Liberalization and Capital Misallocations
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.
File format is application/pdf
Description: Full text
Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2017-05-01
Pages: 47 pages
Note: Date of publication: May 2017.