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Credit Market Imperfection and Sectoral Asymmetry of Chinese Business Cycle

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  • Yuanyan Sophia Zhang
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    Abstract

    This paper analyzes the role of credit market imperfection and sectoral asymmetry as a means through which shocks to the real economy are propagated and amplified. Drawing on firm-level data to calibrate the model, our simulations capture two key stylized facts of the Chinese economy: that credit constraints are more binding in nontradable sectors than in tradable industries and that output volatility is much greater in China than in industrial economies. We find that the driving force behind our simulation results is strongly related to the non-uniform nature of credit market imperfections in China and their implications for resource allocation and the way in which the economy reacts to shocks. Correctly capturing these macro-financial interactions are essential to understand the dynamic behavior of the Chinese economy.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/118.

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    Length: 35
    Date of creation: 01 May 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/118

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    Related research

    Keywords: Economic models; credit market; exchange rate; real exchange rate; credit constraints; credit constraint; investment decisions; fixed investment; real exchange rate movement; exchange rate movement; exchange rate appreciation; real exchange rate appreciation; exchange rate depreciation; foreign investment; foreign banks; real exchange rate depreciation; foreign direct investment; direct investment; real exchange rate dynamic; nominal exchange rate; international trade; exchange rate adjustment; fdi; exchange rate dynamic; industrial economies; manufacturing goods; investment climate; direct foreign investment;

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    1. repec:hal:cesptp:hal-00633901 is not listed on IDEAS
    2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    3. Héricourt, Jérôme & Poncet, Sandra, 2009. "FDI and credit constraints: Firm-level evidence from China," Economic Systems, Elsevier, vol. 33(1), pages 1-21, March.
    4. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
    5. Gang Gong & Justin Yifu Lin, 2005. "Deflationary Expansion : an Overshooting Perspective to the Recent Business Cycle in China," Macroeconomics Working Papers 21959, East Asian Bureau of Economic Research.
    6. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
    7. Aaron Tornell & Frank Westermann, 2003. "Credit Market Imperfections in Middle Income Countries," CESifo Working Paper Series 960, CESifo Group Munich.
    8. Gao, Xu, 2007. "Business Cycle Accounting for the Chinese Economy," MPRA Paper 7050, University Library of Munich, Germany, revised Dec 2007.
    9. Mark Gertler & R. Glenn Hubbard, 1988. "Financial factors in business fluctuations," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 33-78.
    10. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    11. Gertler, Mark, 1992. "Financial Capacity and Output Fluctuations in an Economy with Multi-period Financial Relationships," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 455-72, July.
    12. Calomiris, Charles W & Hubbard, R Glenn, 1990. "Firm Heterogeneity, Internal Finance, and 'Credit Rationing.'," Economic Journal, Royal Economic Society, vol. 100(399), pages 90-104, March.
    13. Jahangir Aziz, 2008. "Real and Financial Sector Linkages in China and India," IMF Working Papers 08/95, International Monetary Fund.
    14. Loren Brandt & Xiaodong Zhu, 2000. "Redistribution in a Decentralized Economy: Growth and Inflation in China under Reform," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 422-451, April.
    15. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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