Interest Rate Control and the Imbalance of Aggregate Demand Structure
Read
DownLoad |
| Title | Interest Rate Control and the Imbalance of Aggregate Demand Structure
|
| Author | Chen Yanbin, Chen Xiaoliang and Chen Weize |
| Organization | School of Economics, Renmin University of China;Department of Economics, Boston University |
| Email | cyb@ruc.edu.cn；chenxiaoliang2200@126.com；sysu2006vc@126.com |
| Key Words | Interest Rate Control; Interest Rate Liberalization; Financial Constraints; Economic Growth; Imbalance of Aggregate Demand Structure |
| Abstract | This paper introduces interest rate control depicted by “distorting tax” into a dynamic general equilibrium model with idiosyncratic productivity shocks and financial constraints, in order to study effects of interest rate control on the imbalance of aggregate demand structure and effects of interest rate liberalization on the macro economy. The result implies that interest rate control accounts for the imbalance of aggregate demand structure by enlarging investment scale and squeezing out consumption. Moreover financial constraints reduce efficiency of capital reallocation, and therefore exacerbate the effects of interest rate control. Interest rate liberalization could increase households’ disposable income, and therefore incline consumption-GDP ratio by 4.7 base-points, which benefits rebalancing of aggregate demand structure. But the liberalization leads to a sharp rise of interest rate by 25.4%, and therefore investment scale slumps due to an upturn of capital cost while capital misallocation remains severe because of financial friction, and total output drops by 7.2% eventually. Nowadays, deep-side economic problems still make the Chinese society difficult to withstand output collapse. We suggest implementing interest rate liberalization gradually, rather than radically. |
| Serial Number | WP610 |
| Time | 2014-08-05 |
|