2016-10 | May 2017
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Reserve Requirements and Optimal Chinese Stabilization Policy
We build a two-sector DSGE model to study the impact of reserve requirement adjustments, a frequently-used policy tool, for capital reallocation and business cycle stabilization in China. State-owned enterprises (SOEs) are financed by government-guaranteed bank loans, which are subject to reserve requirements, while private firms rely on unregulated “off-balance sheet” financing. Increasing reserve requirements taxes SOE activity and reallocates resources to private firms. This raises aggregate productivity, as SOEs are relatively unproductive, but increases the incidence of costly SOE failures. Under our calibration, optimal reserve requirement adjustments complement interest rate policy in maintaining macroeconomic stability and improving welfare.
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Chang, Chun, Zheng Liu, Mark M. Spiegel, and Jingyi Zhang. 2016. "Reserve Requirements and Optimal Chinese Stabilization Policy," Federal Reserve Bank of San Francisco Working Paper 2016-10. Available at https://doi.org/10.24148/wp2016-10