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Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front. Econ. China    2014, Vol. 9 Issue (4) : 661-694    https://doi.org/10.3868/s060-003-014-0030-1
research-article |
Bank Credit, Firm Entry and Exit, and Economic Fluctuations in China
Ling Feng1(),Yizhong Guan2(),Zhiyuan Li3()
1. School of Finance, Shanghai University of Finance and Economics, Shanghai 200433, China
2. Risk Management Department, Industrial and Commercial Bank of China, Shanghai Municipal Branch, Shanghai 200120, China
3. School of Economics, Shanghai University of Finance and Economics, Shanghai 200433, China
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Abstract

This study explores how a worsening bank credit quality affects firms’ entry and exit decisions (i.e., changes in the extensive margin), and how the extensive margin variation amplifies the transmission of financial and technological shocks to the real economy. Using a vector autoregression (VAR) model, our empirical evidence indicates that deteriorating Chinese bank credit conditions have a significant negative influence on net firm entry to the market. To explore the potential mechanism behind the stylized fact, we establish a dynamic stochastic general equilibrium (DSGE) model featuring fixed production costs, loss-related bank credit quality shocks and an endogenous balance sheet constraint which restricts the aggregate credit supply by the level of the banks’ net worth. Model simulations indicate that the interaction of financial constraints and the extensive margin variation amplifies the impact of bank credit shocks on the real economy. When banks experience loss-related financial shocks, bank credit tightens, which increases firms’ external financing costs. When the firms’ expected income is not sufficient to cover the fixed production cost, some firms exit from or stop entering the market. As a result, the economy displays a severe recession and a slow recovery.

Keywords bank credit      financial constraint      firm extensive margin     
Issue Date: 11 December 2014
 Cite this article:   
Ling Feng,Yizhong Guan,Zhiyuan Li. Bank Credit, Firm Entry and Exit, and Economic Fluctuations in China[J]. Front. Econ. China, 2014, 9(4): 661-694.
 URL:  
http://academic.hep.com.cn/fec/EN/10.3868/s060-003-014-0030-1
http://academic.hep.com.cn/fec/EN/Y2014/V9/I4/661
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