State-owned Sector and the Effectiveness of Monetary Policy in China
with Shen Guo and Huimin Shi, Emerging Markets Finance and Trade, forthcoming, 2020.
Based on a standard two-sector New Keynesian sticky price model, we show that the response of sectoral output share to a monetary policy shock can be used to assess the relative price stickiness between the state-owned and private sectors in China. Specifically, the output share of the sector with more price stickiness increases to a positive monetary shock. A structural VAR analysis on the Chinese industrial data confirms that the price is stickier in the state-owned sector. This result implies that the real effect of monetary policy at the aggregate level in China would diminish along the potential decline of the state-owned sector.
with Shen Guo and Huimin Shi, Emerging Markets Finance and Trade, forthcoming, 2020.
Based on a standard two-sector New Keynesian sticky price model, we show that the response of sectoral output share to a monetary policy shock can be used to assess the relative price stickiness between the state-owned and private sectors in China. Specifically, the output share of the sector with more price stickiness increases to a positive monetary shock. A structural VAR analysis on the Chinese industrial data confirms that the price is stickier in the state-owned sector. This result implies that the real effect of monetary policy at the aggregate level in China would diminish along the potential decline of the state-owned sector.
Optimal Fiscal Policy with Land Financing in China
with Shen Guo, Macroeconomic Dynamics, 23 (7), 2649-2674, 2019.
This paper examines China’s optimal fiscal policy in a general equilibrium model, in which the
government finances its budget through both a special instrument, an implicit tax on the residential
land, and a typical conventional instrument, the value-added tax (VAT). By solving a Ramsey problem,
we find that (i) the optimal policy suggests a much lower land tax rate than the existing rate in
China, and (ii) a substantial part of debt stabilization should come through an adjustment in the VAT
rate, instead of relying on land financing. Switching from the existing policy to the Ramsey policy
generates significant welfare gains.
with Shen Guo, Macroeconomic Dynamics, 23 (7), 2649-2674, 2019.
This paper examines China’s optimal fiscal policy in a general equilibrium model, in which the
government finances its budget through both a special instrument, an implicit tax on the residential
land, and a typical conventional instrument, the value-added tax (VAT). By solving a Ramsey problem,
we find that (i) the optimal policy suggests a much lower land tax rate than the existing rate in
China, and (ii) a substantial part of debt stabilization should come through an adjustment in the VAT
rate, instead of relying on land financing. Switching from the existing policy to the Ramsey policy
generates significant welfare gains.
The Business Cycle Implications of Bank Discrimination in China
with Shen Guo and Huimin Shi, Economic Modelling, 73, 264-278, 2018.
Banks in China favor state-owned enterprises (SOEs) and discriminate against privately owned enterprises (POEs) in credit allocation. This paper explores the business cycle implications of bank discrimination in an estimated two-sector model. We model bank discrimination by assuming that real estate serves as collateral and that POEs have lower loan-to-value ratios than SOEs. We find that bank discrimination causes resource misallocation by crowding out the more productive POEs, which helps to quantitatively explain the volatility of SOE output share. We further find that housing demand booms and monetary easing drive up the real estate value, enhance the borrowing capacity of SOEs by more with bank discrimination, and thus lead to a rise in SOE output share to exacerbate resource misallocation.
with Shen Guo and Huimin Shi, Economic Modelling, 73, 264-278, 2018.
Banks in China favor state-owned enterprises (SOEs) and discriminate against privately owned enterprises (POEs) in credit allocation. This paper explores the business cycle implications of bank discrimination in an estimated two-sector model. We model bank discrimination by assuming that real estate serves as collateral and that POEs have lower loan-to-value ratios than SOEs. We find that bank discrimination causes resource misallocation by crowding out the more productive POEs, which helps to quantitatively explain the volatility of SOE output share. We further find that housing demand booms and monetary easing drive up the real estate value, enhance the borrowing capacity of SOEs by more with bank discrimination, and thus lead to a rise in SOE output share to exacerbate resource misallocation.
The Missing Trade of China: Balls-and-Bins Model
with Huimin Shi, Empirical Economics, 50 (4), 1511-1526, 2016.
Our paper applies the balls-and-bins model to China's shipment level trade data of 2005. Similar to the results of the U.S. data, we find that the balls-and-bins model matches the numbers and the gravity patterns of zero trade flows both at the country-product and country-firm levels reasonably well, but fails to predict the percentage of exporting firms as in the data. However, different from the results of the U.S. data, we find that the model fails to predict the percentages of the single-product, single-destination, or single-product-and-single-destination exporting firms as in the data.
Our paper applies the balls-and-bins model to China's shipment level trade data of 2005. Similar to the results of the U.S. data, we find that the balls-and-bins model matches the numbers and the gravity patterns of zero trade flows both at the country-product and country-firm levels reasonably well, but fails to predict the percentage of exporting firms as in the data. However, different from the results of the U.S. data, we find that the model fails to predict the percentages of the single-product, single-destination, or single-product-and-single-destination exporting firms as in the data.
The Selection of Firms Based on Productivity: Different Roles of Entry and Overhead Cost
with Huimin Shi, Economic Modelling, 54 (C), 537-544, 2016.
This paper investigates the different roles of entry cost and overhead cost in the productivity-based selection of firms into production. It also discusses the implications for the resource allocations of the aggregate economy. Using an analytically tractable model with entry and exit, we show that reducing entry cost will increase average firm productivity by encouraging more entries of firms, whereas reducing overhead cost will decrease it by adversely lowering the selection standard. From the perspective of improving the allocation of production resources, our findings suggest that the various policies designed to reduce the costs of setting up new businesses are more important than the policies designed simply to reduce operation costs.
with Huimin Shi, Economic Modelling, 54 (C), 537-544, 2016.
This paper investigates the different roles of entry cost and overhead cost in the productivity-based selection of firms into production. It also discusses the implications for the resource allocations of the aggregate economy. Using an analytically tractable model with entry and exit, we show that reducing entry cost will increase average firm productivity by encouraging more entries of firms, whereas reducing overhead cost will decrease it by adversely lowering the selection standard. From the perspective of improving the allocation of production resources, our findings suggest that the various policies designed to reduce the costs of setting up new businesses are more important than the policies designed simply to reduce operation costs.
Sectoral Technological Progress, Migration Barriers, and Structural Change in China
with Huimin Shi, Journal of Comparative Economics, 43 (2), 257–273, 2015.
We introduce a novel accounting method to infer sectoral technology and migration barriers among Chinese provinces, using data on structural change and migration from 1990 to 2010. The method is based on a multi-sector Eaton–Kortum model, embodying labor mobility friction across provinces. We find that the implied migration barriers are high and asymmetric. This asymmetry of migration barriers contributes to the expansion of provincial manufacturing labor share among all the provinces. Moreover, in a country with structural change, rich provinces gain less from inter-provincial trade than poor provinces.
We introduce a novel accounting method to infer sectoral technology and migration barriers among Chinese provinces, using data on structural change and migration from 1990 to 2010. The method is based on a multi-sector Eaton–Kortum model, embodying labor mobility friction across provinces. We find that the implied migration barriers are high and asymmetric. This asymmetry of migration barriers contributes to the expansion of provincial manufacturing labor share among all the provinces. Moreover, in a country with structural change, rich provinces gain less from inter-provincial trade than poor provinces.