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Credit Expansion and Misallocation

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  • Yuanchen Yang
  • Yangyang Liu

Abstract

In response to the global financial crisis in 2008, the Chinese government launched a 4-trillion-yuan economic stimulus plan, which represented a typical episode of government intervention in the economy. This paper analyzed the impact of the stimulus plan, which mainly took the form of bank credit lines, on resource allocation and aggregate productivity. Using manufacturing data from 2001 to 2013, we showed empirically that it pulled up the total demand in the short term, but by extending excessive credit to weak firms, it created resource misallocation and over-capacity in the long term. This effect was observed after a lag of 3 years and was especially pronounced in resource-based industries. The results carried strong implications for emerging economies that undertook similar stimulus plans and whose financial markets have been plagued by severe frictions. JEL classification numbers: G01, G21, G28

Suggested Citation

  • Yuanchen Yang & Yangyang Liu, 2020. "Credit Expansion and Misallocation," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(4), pages 1-5.
    • Handle: RePEc:spt:apfiba:v:10:y:2020:i:4:f:10_4_5
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    References listed on IDEAS

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    Cited by:

    1. Mr. Kenneth Rogoff & Yuanchen Yang, 2022. "A Tale of Tier 3 Cities," IMF Working Papers 2022/196, International Monetary Fund.

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    More about this item

    Keywords

    Bank credit; Corporate governance; Financial crisis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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