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Political Connections, Discriminatory Credit Constraint and Business Cycle

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  • Peng, Yuchao
  • Yan, Lili

Abstract

This paper builds a banking DSGE model based on endogenous loan to value ratios, taking the different relationship between different types of enterprises and banks into account. Due to the political connections between the bank and enterprises, loan to value ratio for favored enterprises (e.g. state-owned enterprises) is endogenously higher than that for non-favored enterprises (e.g. private enterprises), which is called discriminatory credit constraint in this paper. Compared to non-discriminatory credit constraint, we find that discriminatory credit constraint can further amplify the impact of negative technology shocks on output, and reduce the effectiveness of expansionary monetary policy. Empirical evidence from China industrial firms’ data supports our conclusion.

Suggested Citation

  • Peng, Yuchao & Yan, Lili, 2015. "Political Connections, Discriminatory Credit Constraint and Business Cycle," MPRA Paper 61439, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:61439
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    References listed on IDEAS

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    More about this item

    Keywords

    Discriminatory Credit Constraint; Political Connections; Financial Accelerator;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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