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2 results

  • Size-dependent financial frictions, capital misallocation, and aggregate productivity

  • Xiaolu Zhu
  • Journal:
    Macroeconomic Dynamics / Volume 27 / Issue 5 / July 2023
    Published online by Cambridge University Press:
    01 July 2022, pp. 1345-1382
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  • This paper quantitatively examines the macroeconomic effects of size-dependent financial frictions on capital misallocation and aggregate total factor productivity. Based on panel data from China’s manufacturing sector, I find that among non-state-owned enterprises, (i) the dispersion of the marginal product of capital is large and persistent and (ii) large firms tend to have higher leverage, and lower mean and dispersion of the marginal product of capital than their small counterparts. This paper analyzes a dynamic stochastic general equilibrium model with heterogeneous agents and size-dependent financial frictions. By calibrating the model to a Chinese firm-level dataset, I show that in addition to matching the aforementioned stylized facts, the economy with a size-dependent borrowing constraint is able to reproduce the observed negative correlation between firm size and the marginal product of capital, as well as generate quantitatively modest TFP loss. Furthermore, ignoring firms’ size-dependent financing patterns may lead to an overstatement of TFP loss due to financial frictions.

  • 6 - The Importance of Financial Sector Reform

  • Edwin L.-C. Lai, Hong Kong University of Science and Technology
  • Book:
    One Currency, Two Markets
    Published online:
    17 June 2021
    Print publication:
    08 July 2021, pp 138-193

  • Summary

    In Chapter 6, I discuss the importance of financial sector reform, focusing on the banking sector, the bond market, and the stock market. The banking sector is still characterized by financial repression. The largest banks are all state-owned, the interest rates are not market-determined, and state-owned enterprises (SOEs) still enjoy preferential access to credits compared with the private sector. The bond market developed only recently. Most important developments in the Chinese bond market happened only since about 2015. China’s bond market is characterized by its relatively small size relative to its GDP, low turnover ratio, and low foreign ownership. The central government bond market, which is most important for the internationalization of the RMB, needs to be much further developed in order to the pave way for the RMB to serve as a significant reserve currency. The market capitalization of the stock market is small relative to the GDP of China. It is characterized by low fund-raising capacity, excessive government intervention, lack of transparency, capital controls, and other issues. The good news for the financial market is that market opening and integration with the rest of the world did not slow down in recent years.