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Upstream subsidy or downstream subsidy? A quantitative analysis of credit subsidy in China

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  • Song, Hengxu
  • Yang, Zhongchao
  • Zhou, Yue

Abstract

We construct a multi-industry general equilibrium model to study the effects of industrial credit policies. This model is characterized by firm heterogeneity, credit constraints, and production network. We calibrate the model using data from China and show that downstream industries face much tighter credit constraints than upstream industries. However, the key finding of our model is that upstream credit subsidy is more effective than downstream subsidy in increasing aggregate output and capital stock. The input–output linkages between upstream and downstream industries are the driving force behind this outcome. Our research also suggests that credit subsidy might encourage firms to use more capital and less labor in production. We extend the benchmark model to several industries and show that our key result is robust.

Suggested Citation

  • Song, Hengxu & Yang, Zhongchao & Zhou, Yue, 2023. "Upstream subsidy or downstream subsidy? A quantitative analysis of credit subsidy in China," Economic Modelling, Elsevier, vol. 129(C).
    • Handle: RePEc:eee:ecmode:v:129:y:2023:i:c:s0264999323003516
    DOI: 10.1016/j.econmod.2023.106539
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    More about this item

    Keywords

    Credit subsidy; Production network; Firm heterogeneity; China economy;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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