Federal Reserve Bank of San Francisco
Working Paper Series
Interest-Rate Liberalization and Capital Misallocations
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.
Cite this item
Zheng Liu & Pengfei Wang & Zhiwei Xu, Interest-Rate Liberalization and Capital Misallocations, Federal Reserve Bank of San Francisco, Working Paper Series 2017-15, 01 May 2017.
Note: Date of publication: May 2017.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
This item with handle RePEc:fip:fedfwp:2017-15
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