Bank Credit, Firm Entry and Exit, and Economic Fluctuations in China
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| Title | Bank Credit, Firm Entry and Exit, and Economic Fluctuations in China
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| Author | Ling Feng, Yizhong Guan, Zhiyuan Li and Ching-Yi Lin |
| Organization | Shanghai University of Finance and Economics, SUFE |
| Email | feng.ling@mail.shufe.edu.cn |
| Key Words | Bank Credit; Financial Constraint; Firm Extensive Margin |
| Abstract | This study explores how the deterioration of bank credit quality in China affects firms' decisions on entries and exits (i.e., changes in the extensive margin) and production (i.e., changes in the intensive margin), how the change in extensive margin amplifies the transmission of financial and technology shocks to real economy. Our empirical evidence using vector autoregression (VAR) model has indicated that deteriorations in Chinese bank credit market conditions have significant negative influences on firm net entries to the market. To explore the potential mechanism behind the stylized fact, we established a dynamic stochastic general equilibrium (DSGE) modelsin which loss-related shocks exist in bank credit quality, potential financial constraints limit the scale of bank credit, and firm production requires the payment of sunk entry costs. Simulation indicated that the interaction of bank balance sheet constraint and the changes in the extensive margin amplifies the impact of exogenous shocks on the real economy. When banks experience loss-related shocks regarding credit quality, bank credit tightens, the costs of firm external finance increase, and subsequently some firms exit the market. As a result, the economy displayed a severe recession and a slow recovery. |
| Serial Number | WP502 |
| Time | 2013-08-01 |
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