Credit Misallocation, Endogenous TFP Changes, and Economic Fluctuation in China

In 2009, to cope with the economic slowdown China initiated a large-scale stimulus mainly in the form of bank credit that favored the state-owned sector. Data shows that during the policy easing episodes the credits allocated to the private enterprises (PE) are crowded out by the state-owned enterprises (SOE). I then incorporate SOE and PE into a standard dynamic stochastic general equilibrium (DSGE) model without imposing any ex ante asymmetry to the two sectors. The calibration exercise reveals two findings from a static view: (i) while on average the leverage of SOE is close to that of PE, the credit constraint is much smaller for SOE than PE, consistent with the well accepted views; (ii) the credit misallocation exists in the sense that by deleveraging the SOE can lead to aggregate efficiency gains. On the dynamic side, however, numerical simulations indicate that endogenous TFP changes brought about by the asymmetric credit shocks that are consistent with the data are in fact quantitatively unimportant to economic fluctuations.