Political Connections, Discriminatory Credit Constraint and Business Cycle

Peng, Yuchao and Yan, Lili (2015): Political Connections, Discriminatory Credit Constraint and Business Cycle.

Abstract

This paper builds a banking DSGE model based on endogenous loan to value ratios, taking the different relationship between different types of enterprises and banks into account. Due to the political connections between the bank and enterprises, loan to value ratio for favored enterprises (e.g. state-owned enterprises) is endogenously higher than that for non-favored enterprises (e.g. private enterprises), which is called discriminatory credit constraint in this paper. Compared to non-discriminatory credit constraint, we find that discriminatory credit constraint can further amplify the impact of negative technology shocks on output, and reduce the effectiveness of expansionary monetary policy. Empirical evidence from China industrial firms’ data supports our conclusion.

• Item Type: MPRA Paper
• Language: English
• Keywords: Discriminatory Credit Constraint, Political Connections, Financial Accelerator
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Ajevskis, Viktors, and Kristine Vitola. 2011. “Housing and Banking in a Small Open Economy DSGE Model.” Latvijas Banka.

Barro, Robert J. 1999. “Notes on Growth Accounting.” Journal of Economic Growth 4 (2): 119–137.

Bartelsman, Eric, John Haltiwanger, and Stefano Scarpetta. 2013. “Cross-Country Differences in Productivity: the Role of Allocation and Selection.” The American Economic Review 103 (1): 305–334.

Bene v s, Jarom i r, and Kirdan Lees. 2007. “Monopolistic Banks and Fixed Rate Contracts: Implications for Open Economy Inflation Targeting.”

Bernanke, Ben S, Mark Gertler, and Simon Gilchrist. 1999. “The Financial Accelerator in a Quantitative Business Cycle Framework.” Handbook of Macroeconomics 1: 1341–1393.

Brandt, Loren, and Hongbin Li. 2003. “Bank Discrimination in Transition Economies: Ideology, Information, or Incentives?.” Journal of Comparative Economics 31 (3): 387–413.

Carvalho, Daniel. 2014. “The Real Effects of Government-Owned Banks: Evidence From an Emerging Market.” The Journal of Finance 69 (2): 577–609.

Cull, Robert, Asli Demirgü c c Kunt, and Jonathan Morduch. 2009. “Microfinance Tradeoffs: Regulation, Competition, and Financing.” World Bank Policy Research Working Paper Series, Vol.

Cull, Robert, Wei Li, Bo Sun, and Lixin Colin Xu. 2013. “Government Connections and Financial Constraints: Evidence From a Large Representative Sample of Chinese Firms.”

Dellas, Harris, Behzad Diba, and Olivier Loisel. 2013. “Liquidity Shocks, Equity-Market Frictions, and Optimal Policy.” Macroeconomic Dynamics: 1–25.

Dib, Ali. 2010. “Banks, Credit Market Frictions, and Business Cycles.” Bank of Canada Working Paper.

Dollar, David, and Shang-Jin Wei. 2007. “Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China.” National Bureau of Economic Research Cambridge, Mass., USA.

Felipe, Jesus. 1999. “Total Factor Productivity Growth in East Asia: a Critical Survey.” The Journal of Development Studies 35 (4): 1–41.

Fisman, Raymond, and Inessa Love. 2003. “Trade Credit, Financial Intermediary Development, and Industry Growth.” The Journal of Finance 58 (1): 353–374.

Gerali, Andrea, Stefano Neri, Luca Sessa, and Federico M Signoretti. 2010. “Credit and Banking in a DSGE Model of the Euro Area.” Journal of Money, Credit and Banking 42 (s1): 107–141.

Gertler, Mark, and Peter Karadi. 2011. “A Model of Unconventional Monetary Policy.” Journal of Monetary Economics 58 (1): 17–34.

Gilchrist, Simon, Jae W Sim, and Egon Zakraj v s ek. 2013. “Misallocation and Financial Market Frictions: Some Direct Evidence From the Dispersion in Borrowing Costs.” Review of Economic Dynamics 16 (1): 159–176.

Gordon, Roger H, and Wei Li. 2011. “Provincial and Local Governments in China: Fiscal Institutions and Government Behavior.” In Capitalizing China, 337–369. University of Chicago Press.

Guariglia, Alessandra, and Sandra Poncet. 2008. “Could Financial Distortions Be No Impediment to Economic Growth After All? Evidence From China.” Journal of Comparative Economics 36 (4): 633–657.

Hsieh, Chang-Tai, and Peter J Klenow. 2009. “Misallocation and Manufacturing TFP in China and India.” The Quarterly Journal of Economics 124 (4): 1403–1448.

Iacoviello, Matteo. 2005. “House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle.” American Economic Review: 739–764.

Jermann, Urban, and Vincenzo Quadrini. 2009. “Macroeconomic Effects of Financial Shocks.” National Bureau of Economic Research.

Kamber, Gunes, and Christoph Thoenissen. 2011. “Financial Intermediation and the International Business Cycle: the Case of Small Countries with Big Banks.” Centre for Applied Macroeconomics Analysis (CAMA) Working Paper (22).

Kang, Li, Liutang Gong, and Yongwei Chen. 2013. “Financial Friction, Bank Net Assets and the Trasmission of Economic Fluctuations Amoung Industries.” Journal of Financial Research[Chinese] 5.

Kiyotaki, Nobuhiro, and John Moore. 1997. “Credit Chains.” Journal of Political Economy 105 (21): 211–248.

Kiyotaki, Nobuhiro, and John Moore. 2012. “Liquidity, Business Cycles, and Monetary Policy.” National Bureau of Economic Research.

Le, Vo Phuong Mai, Kent Matthews, David Meenagh, Patrick Minford, and Zhiguo Xiao. 2014. “Banking and the Macroeconomy in China: a Banking Crisis Deferred?.” Open Economies Review 25 (1): 123–161.

Li, Hongbin, Lingsheng Meng, Qian Wang, and Li-An Zhou. 2008. “Political Connections, Financing and Firm Performance: Evidence From Chinese Private Firms.” Journal of Development Economics 87 (2): 283–299.

Lin, Justin Yifu. 2013. “China Economy Still Have Growth Potential of 8%.” China Real Estate [Chinese] 9.

Mason, Robert D, Douglas A Lind, and W G Marchal. 1990. Statistical Techniques in Business and Economics. Irwin Boston (Ma).

Midrigan, Virgiliu, and Daniel Yi Xu. 2010. “Finance and Misallocation: Evidence From Plant-Level Data.” National Bureau of Economic Research.

Moll, Benjamin. 2014. “Productivity Losses From Financial Frictions: Can Self-Financing Undo Capital Misallocation?.” American Economic Review 104 (10): 3186–3221.

Roger, Scott, and Jan Vl v c ek. 2011. “Macroeconomic Costs of Higher Bank Capital and Liquidity Requirements.” IMF Working Papers: 1–51.

Schmitt-Grohé, Stephanie, and Martin Uribe. 2006. “Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model.” In NBER Macroeconomics Annual 2005, Volume 20, 383–462. MIT Press.

Smets, Frank, and Raf Wouters. 2003. “An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area.” Journal of the European Economic Association 1 (5): 1123–1175.

Smets, Frank, and Rafael Wouters. 2007. “Shocks and Frictions in US Business Cycles: a Bayesian DSGE Approach.”

Song, Zheng, Kjetil Storesletten, and Fabrizio Zilibotti. 2011. “Growing Like China.” The American Economic Review 101 (1): 196–233.

Wang, Guojing, and Guoqiang Tian. 2014. “Financial Shocks and Chinese Economic Fluctuations.” Economic Research Journal [Chinese] 3.

Xu, Wei, and Binkai Chen. 2009. “Bank Lending and Economic Fluctuations in China: 1993-2005 [J].” China Economic Quarterly [Chinese] 3.

Yan, Lili. 2012. “Financial Intermediary Efficiency and the Effect of Monetary Policy: Analysis Based on a DSGE Model.” Studies of International Finance[Chinese] 6.