In this paper, I investigate the effect of government policies that reduce the credit constraint and entry barrier for firms in the Chinese economy quantitatively. To build a framework which is suitable for quantitative analysis, I incorporate feature of Chinese economy into a standard RBC model. These features include the difference in productivity and asymmetric access to financial markets between state owned enterprises (SOE) and private enterprises (PE) and vertical production structure discussed in Li, Liu, and Wang [30]. In particular, I introduce endogenous firm dynamics in both the upstream and downstream sector. Quantitative analysis show that this model can explain specific patters of Chinese business cycles, especially the relative volatility of investment, reasonably...[ Read more ]

In this paper, I investigate the effect of government policies that reduce the credit constraint and entry barrier for firms in the Chinese economy quantitatively. To build a framework which is suitable for quantitative analysis, I incorporate feature of Chinese economy into a standard RBC model. These features include the difference in productivity and asymmetric access to financial markets between state owned enterprises (SOE) and private enterprises (PE) and vertical production structure discussed in Li, Liu, and Wang [30]. In particular, I introduce endogenous firm dynamics in both the upstream and downstream sector. Quantitative analysis show that this model can explain specific patters of Chinese business cycles, especially the relative volatility of investment, reasonably well and thus can be used as a benchmark model for policy analysis. From the policy experiments, I find the output will increase the most once the entry barrier for private firms in the upstream sector are reduced. The credit policy experiment shows loose credit restriction will lead to higher output but a shift of investment from upstream to downstream. These results indicate upstream private firms are the most constrained.