Working Paper

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.

JEL Classification: G18; O41; E44;

https://doi.org/10.24148/wp2017-15

Access Documents

File(s): File format is application/pdf http://www.frbsf.org/economic-research/files/wp2017-15.pdf
Description: Full text

Authors

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2017-05-01

Number: 2017-15

Pages: 47 pages

Note: Date of publication: May 2017.