Interest Rate Control and Capital Misallocation——A Quantitative Analysis Based on Vertical Production Structure
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| Title | Interest Rate Control and Capital Misallocation——A Quantitative Analysis Based on Vertical Production Structure
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| Author | Chen Xiaoliang and Chen Weize |
| Organization | Institute of Economics, CASS; Department of Economics, Boston University |
| Email | chenxiaoliang2200@126.com；sysu2006vc@126.com |
| Key Words | Interest Rate Control; Vertical Production Structure; Capital Misallocation; Interest Rate Liberalization; SOE Reform |
| Abstract | The vertical production structure -- monopolistic state-owned enterprises (SOE) take control at upstream industries while non-state-owned enterprises (NSOE) compete at downstream industries -- results from the subsidies and monopolistic pricing power to SOE, and upstream entry barriers, and therefore leads to severe capital misallocation between SOE and NSOE. This paper develops a dynamic general equilibrium model in the presence of interest rate control and vertical production structure to clarify the mechanisms of capital misallocation between SOE and NSOE. On the one hand, owing to monopolistic power, SOE, especially loss-making ones, crowd out capital investment of NSOE to upstream, and depress investment of NSOE at downstream by pushing prices of intermediate goods up, causing severe capital misallocation. On the other hand, interest rate control strengthens the above impact furthermore by imposing more price distortion. After Interest Rate Liberalization and SOE Reform with breaking entry barriers down, capital misallocation will be ameliorated substantially, and aggregate output and consumption incline 24.2% and 66.9% respectively, upon being in the new equilibrium. Additionally, Interest Rate Liberalization and SOE Reform to be implemented simultaneously outperforms sequentially. |
| Serial Number | WP1224 |
| Time | 2017-09-21 |
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