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Credit Market Imperfection and Sectoral Asymmetry of Chinese Business Cycle

  • Yuanyan Sophia Zhang
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    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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    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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    1. Mark L. Gertler & R. Glenn Hubbard, 1988. "Financial Factors in Business Fluctuations," NBER Working Papers 2758, National Bureau of Economic Research, Inc.
    2. repec:imf:imfwpa:08/95 is not listed on IDEAS
    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. Charles W. Calomiris & R. Glenn Hubbard, 1988. "Firm Heterogeneity, Internal Finance, and `Credit Rationing'," NBER Working Papers 2497, National Bureau of Economic Research, Inc.
    5. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
    6. 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.
    7. 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.
    8. 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.
    9. Aaron Tornell & Frank Westermann, 2003. "Credit Market Imperfections in Middle Income Countries," NBER Working Papers 9737, National Bureau of Economic Research, Inc.
    10. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
    11. 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.
    12. 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.
    13. Gao, Xu, 2007. "Business Cycle Accounting for the Chinese Economy," MPRA Paper 7050, University Library of Munich, Germany, revised Dec 2007.
    14. 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.
    15. Sandra Poncet & Jérôme Héricourt, 2009. "FDI and credit constraints: firm level evidence from China," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00633901, HAL.
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