The Impact of Discriminatory Credit Constraints on Macroeconomy: An Estimated Banking DSGE Model with Endogenous Loan-to-Value Ratios

Abstract

This paper builds a banking DSGE model with endogenous loan-to-value ratios which capture complex relationships between banks and firms. Reflecting the relationship between banks and enterprises, the loan-to-value ratio for state-owned enterprises is endogenously greater than that for private enterprises in China. This is referred to the discriminatory credit constraints in this paper. Compared to the case without, existence of discriminatory credit constraints can amplify the impacts of negative technology shocks on output, and reduce the effectiveness of expansionary monetary policy. Empirical evidence from Chinese industrial firms supports our conclusion.

Keywords: Credit Constraints, Endogenous loan-to-value ratios, Political connections, DSGE models, Ownership, Chinese firms

JEL Classification: E32, E04, E52