Real and Financial Sector Linkages in China and India

38 Pages Posted: 1 Jul 2008

See all articles by Jahangir Aziz

Jahangir Aziz

International Monetary Fund (IMF) - Asia and Pacific Department

Date Written: April 2008

Abstract

In the spirit of what is known as business cycle accounting, this paper finds that the investment wedge - the gap between household's rate of intertemporal substitution and the marginal product of capital - is large and quantitatively significant in explaining China's and India's growth. Specific financial sector policies are shown to map well the size and changes in the investment wedge. In the case of China, nonperforming loans, borrowing constraints, and uncertainty over changes in government guidance in bank lending, have implied large transfers from households to firms that have kept capital cost low and encouraged investment. In the case of India, post-1992 financial sector reforms, particularly the reduction in the funds preempted by the government from the banking system, has played an important role in reducing the cost of capital. Simulations show that for rebalancing growth in China and sustaining high investment rate in India, further financial sector reforms could turn out to be key.

Keywords: Working Paper, China, People's Republic of, India

Suggested Citation

Aziz, Jahangir, Real and Financial Sector Linkages in China and India (April 2008). IMF Working Paper No. 08/95, Available at SSRN: https://ssrn.com/abstract=1153759

Jahangir Aziz (Contact Author)

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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