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Dual-track interest rates and capital misallocation

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  • Chen, Shiyi
  • Lin, Bin

Abstract

The control-track interest rate and the market-track interest rate constitute China's dual-track interest rates. A theoretical model of dual-track interest rates and financial frictions is studied. In the model, bank loans are provided to state-owned enterprises with the control-track interest rate, private enterprises resort to shadow banking with the market-track interest rate. The interest rate wedge between these two interest rates distorts capital allocation, even driving a sector out of production. Full interest rate liberalization which eliminates the interest rate wedge alleviates cross-sector capital misallocation. However, the net effect on aggregate TFP is ambiguous due to the within-sector effect. Under calibrated parameters, full interest rate liberalization improves aggregate TFP moderately, unless the financial reform aimed to have SOEs and POEs face the same degree of financial frictions is also implemented.

Suggested Citation

  • Chen, Shiyi & Lin, Bin, 2019. "Dual-track interest rates and capital misallocation," China Economic Review, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:chieco:v:57:y:2019:i:c:s1043951x19300999
    DOI: 10.1016/j.chieco.2019.101338
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    Citations

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    Cited by:

    1. Yihao Xue & Qiaoyu Liang & Bing Tong, 2022. "The Effects of Energy Supply Shocks and Interest Rate Liberalization in China," CFDS Discussion Paper Series 2022/1, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    2. Tong, Bing, 2021. "The effects of capacity reduction policy under the interest rate peg in China," Journal of Asian Economics, Elsevier, vol. 74(C).
    3. Yun Liu & Yifei Zhang & Heyang Fang & Xin Chen, 2022. "SMEs’ line of credit under the COVID-19: evidence from China," Small Business Economics, Springer, vol. 58(2), pages 807-828, February.
    4. Vinh Q. T. Dang & Isaac Otchere & Erin P. K. So & Isabel K. M. Yan, 2021. "Not all shadow banking is bad! Evidence from credit intermediation of non-financial Chinese firms," Review of Quantitative Finance and Accounting, Springer, vol. 57(4), pages 1437-1462, November.
    5. Tang, Le, 2022. "The dynamic demand for capital and labor: Evidence from Chinese industrial firms," Economic Modelling, Elsevier, vol. 107(C).
    6. Tang, Le, 2021. "Investment dynamics and capital distortion: State and non-state firms in China," Journal of Asian Economics, Elsevier, vol. 73(C).
    7. Chen Yang & Weitao Shen, 2022. "Non-Financial Enterprises’ Shadow Banking Business and Total Factor Productivity of Enterprises," Sustainability, MDPI, vol. 14(13), pages 1-19, July.
    8. Qiao, Sen & Chen, Hsing Hung & Zhang, Rong Rong, 2021. "Examining the impact of factor price distortions and social welfare on innovation efficiency from the microdata of Chinese renewable energy industry," Renewable and Sustainable Energy Reviews, Elsevier, vol. 143(C).
    9. Qiao, Sen & Zhao, Dong Hao & Guo, Zi Xin & Tao, Zhang, 2022. "Factor price distortions, environmental regulation and innovation efficiency: An empirical study on China's power enterprises," Energy Policy, Elsevier, vol. 164(C).

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