Working Paper: CEPR ID: DP1906
Authors: John Bennett; Huw David Dixon
Abstract: A three-sector macromodel of China’s economy is developed, in which the activity of state-owned enterprises (SOEs) is constrained by the state-imposed credit plan for working capital. Our analysis indicates the weakness of credit control and interest rate variation as anti-inflationary tools. In contrast, the hardening of SOEs’ budget constraints is an effective device. The existence of credit and currency controls tends to make devaluation contractionary. Furthermore, because of general equilibrium repercussions, policies that boost industrial exports tend to reduce welfare in rural areas, where poverty is concentrated.
Keywords: China; Money; Credit; Macroeconomic
JEL Codes: 011; 020; P21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weakness of credit control (E61) | ineffective as anti-inflationary tool (E64) |
| interest rate variation (E43) | ineffective as anti-inflationary tool (E64) |
| hardening of SOEs' budget constraints (H72) | effective anti-inflationary measure (E31) |
| policies boosting industrial exports (O25) | reduce welfare in rural areas (I38) |
| increase in interest rates (E43) | increase in aggregate price level (E31) |